Callon Petroleum Company

petroleum company's second quarter 2021 results and operating outlook webcast. All participants will be in listen-only mode. As a reminder, this call is being webcast, and a replay of the call will be archived on the company's website for approximately one year. I'd like to turn the call over to Mark Brewer, Director of Investor Relations, for opening remarks. Please go ahead, sir.

Thank you very much, Nick. Good morning, and thank you for taking the time to join our conference call this morning. With me are Joe Gatto, President and Chief Executive Officer, Dr. Jeff Ballmer, Senior Vice President and Chief Operating Officer, and Kevin Haggard, Senior Vice President and Chief Financial Officer. During our prepared remarks, we'll be referencing the earnings result presentation along with the Delaware Basin acquisition presentation, both of which are posted yesterday afternoon to our website. So I encourage everyone to download the presentations if you haven't already. You can find the slides on our events and presentations page located within the investor section of our website at www.calend.com. Before we begin, I'd like to remind everyone to review our cautionary statements, disclaimers, and important disclosures included on slide two of the earnings presentations and slide two and three of the acquisition presentations. We'll make some forward-looking statements during today's call that refer to estimates and plans. Actual results could differ materially due to the factors noted on these slides and in our periodic SEC filing. We'll also refer some non-GAAP financial measures today, which we believe help to facilitate comparisons across periods and with our peers. For any non-GAAP measures we reference, we provide a reconciliation to the nearest corresponding GAAP measure. You may find these reconciliations in the appendix to the earnings presentation slides in our earnings release press our earnings press release, both of which are available on our website. Following our prepared remarks, we'll open the call for Q&A related to both the quarterly results and our announced acquisition. At this point, I'd like to turn the call over to Joe Gatto.

Thanks, Mark.

Glad to have everyone join us for today's call. As Mark mentioned, yesterday we announced the results from another very solid quarter, along with the next step forward in advancing our stated strategic initiatives. The agreement to acquire the Primix properties in the Southern Delaware Basin consolidates a high-quality asset base into our efficient life-of-field scale development model and increases our oil cut in the basin. The consistent execution of lowering our capital and operating costs and delivering repeatable well results in the Delaware over the last three years makes this a logical addition to our core Delaware footprint, and we anticipate delivering similar performance and synergies across the expanded position of over 110,000 net acres. This proven ability to capture value through the application of our operational model and knowledge base creates upside for a transaction that already screens as accretive across all metrics and is valued at attractive multiples relative to comparable recent deals. In addition to the strategic merits, we will realize substantial financial benefits through a more robust free cash flow outlook and lower capital reinvestment rates that will complement the day one deleveraging impact of the acquisition from the addition of almost 20,000 BOE per day of production, and the equity component of the consideration paid. Along with the acquisition of the Primex assets, we have agreed with Kimmeridge Energy for the exchange of approximately $200 million over 9% second lien senior notes into common shares, which will occur after the closing of the Primex transaction. This will require shareholder approval to issue incremental shares to a party that currently owns over 5% of our shares, and we've already secured approximately 30 percent of the majority vote required. Once complete, this additional step forward will reduce our cash interest expense, lower absolute total debt and senior secured debt balances, and improve our leveraged statistics. Importantly, the combination of the exchange and the acquisition deliver a tremendous positive financial impact while also driving accretion across all key per share metrics. In the interest of having plenty of time for Q&A, we are going to forego our normal process of walking through each of the earnings slides and speak to the higher level points for the second quarter and layer in additional information around the acquisition beyond what is in the presentation materials and press release. During the second quarter, our performance against plan was spot on with capital, production, operating expenses, and G&A all tracking in line to better than expected. A relatively high level of completion activity throughout the second quarter has us off to a great start in July, with volumes increasing nearly 10% from June and our oil cut climbing as well. We are planning to run approximately three and a half rigs on our legacy acreage in the second half of the year as we position operations for a strong handoff into 2022. Based upon an expected early fourth quarter close of the acquisition, we will fold in the activity from the current two-rig program being executed by Pramex later this year. Second quarter cash margins continue to improve as the hedges that were required to enter into 2020 continue to roll off. The addition of the Primex assets will further bolster the oil content of our current Permian production and broader development in the Delaware, supporting strong operating cash margins and contributing to an increase in total corporate cash margins. I'll touch on our ESG efforts and the highlights from our recently issued sustainability report before turning things over to Jeff for a discussion of operations. 2020 was a year of tremendous progress, making significant strides forward on emissions, flaring, and safety. Some select examples of our initiatives include working with outside vendors to improve compressor runtimes, reducing back pressure on the gathering systems, securing alternative offtake options for natural gas as a contingency in the event of a significant third-party facility constraint, and an increase in our water recycling efforts, which will further benefit from the Primex infrastructure base that will more than double our daily recycling capacity. This will not only have a positive impact on our cost structure, but will also reduce the potential burden on local water resources as well. I'm now going to turn things over to Jeff to discuss our current operations and offer some insights on the Primex acquisition.

Great. Good morning, everyone, and thank you, Joe. As Joe mentioned, we had a really solid operational quarter Our drilling team has continued to hold the line on costs, and the outstanding drilling efficiency achieved, for instance, in the Eagleford during the first half of the year is very much on par with our 2020 stats. In the Midland Basin, we've seen significant improvement and, more importantly, have been able to carry over the learnings from Howard County to our position in Midland County. In the Delaware Basin, we continue to make progress on drilling lateral footage per day in both Reeves and Ward Counties. This consistent improvement, coupled with the rapid progress we are seeing on the completion side, has us very excited about the future of our Delaware opportunities. The second quarter was incredibly busy with completions, and as previously mentioned, it materialized in the significant bump in production we're seeing in July. With two full-time crews, an EFRAC pad, and one other spot crew, we were able to complete and turn to production 47 new wells. Costs have continued to remain in check while we push for even better efficiency stats. Again, the Delaware has been an area where we're making tremendous strides with efficiency climbing every quarter and costs continuing to drop. From the third quarter of 2019 until now, we've seen an almost 70% improvement in footage per day. Those gains, along with an improved pricing environment, have lowered the cost per lateral foot more than 50%. Those advancements have clearly improved the future value of our Delaware asset base. And as we take those learnings and couple them with the best practices of the Primex team, continue to refine and adjust our approach, we expect to produce even better wells with very high capital efficiency. And speaking specifically about the acquisition, the current well results and manner in which the Primex team has begun developing the acreage really places us in a very enviable position. We have the opportunity to step into an infrastructure-advantaged, highly contiguous position that has robust, oily results throughout the acreage. And importantly, we have the associated data to feed into our subsurface models, which has helped us map out the 300-plus core locations that immediately compete for capital in our development program. This is high-quality inventory, and I'm speaking specifically about limiting it just to the primary zone, so there's other zones available. but the primary zones have clear proof of development and repeatable results. Equally as important is the ability to continue focusing on larger capital efficient long lateral development projects. So with roughly 85% of these core locations at one and a half to two mile laterals, we can keep the cost per lateral foot low as we shift more of our activity over to the Delaware. After our combination with Carrizo, we set out to uncover and exploit every available opportunity to improve our operations lower costs, and ensure predictability of our development results. And I think you've seen that very clearly. Our team is already looking to leverage our advanced understanding of spacing and stacking, implement our geologic and geomechanical models to optimize targeting and fracture geometry in these larger pad developments, and of course, optimize facilities to reduce potential downtime and flaring. And of course, it also doesn't hurt to have a few extra rigs and completion teams running when we're talking to our vendor partners. I'm going to turn things over to Kevin to discuss financials around the quarter and the transaction.

Thanks, Jeff. It looks like I've got quite a bit to cover on my first quarterly call with Callan. As both Joe and Jeff have discussed, these assets fit exceptionally well with our growing Delaware position and add the opportunity to leverage our development approach across a more robust asset base. Equally important are the expected enhanced financial outcomes of both the acquisition and the impending equity conversion of the second lien notes. We have consistently said that any acquisition must advance our strategic priorities. As we show in the acquisition slide deck, we believe this combination checks all those boxes. Our ability to deleverage the balance sheet at an accelerated pace through enhanced free cash flow has been one of the core focal points for our team. Even at our more conservative planning deck, this acquisition should allow us to be meaningfully ahead of our current expectations by year-end 2022. Operating cash flow, free cash flow, free cash flow per share, and free cash flow yield should all improve, inclusive of the effect of the equity issued with the second lien conversion. This transaction is the type that we believe benefits both our equity and debt investors. Late in June, we accessed the high-yield capital markets for an oversubscribed, upsized, and well-received seven-year, $650 million senior unsecured notes issuer. We use the proceeds from this to fully redeem 543 million of our senior notes maturing in 2023 and reduce borrowings under the RBL. After that transaction, we received upgrades from both Moody's and S&P based on our improved financial position and visibility to further deleveraging over time. We now possess the opportunity to advance that deleveraging timetable and in turn, continue to lower our overall corporate cost of capital. With this acquisition, we are prudently moving to secure the associated cash flow and protect against any near-term commodity market weakness. In the past few weeks, we have added hedges for 2022 oil, including 8,000 barrels of costless WTI collar positions at approximately 60 by 70 and supplemented these with 4,500 barrels per day of swaps at approximately 6,650. With this recent hedging activity, we are approaching historical year-end hedge levels in terms of percentages. which ensures we are on the path to delivering on our promise of an improved balance sheet. With current strip prices for 2022 hovering around 65 per barrel for WTI, we have made significant progress in securing our conservative planning case price assumptions, but maintaining significant upside if the current strip pricing proves accurate. And finally, speaking to the financing of the Primex acquisition, we will be paying $440 million in cash. This is an amount we can place on the credit facility and pay down with free cash flow and divestiture proceeds. However, we will look to the capital markets to see if there are opportunities to term out a portion of these cash needs, allowing us to continue focusing on increasing liquidity and extending our maturity runway. At this point, I'd like to turn the call back over to Joe.

Thanks, Kevin.

I'll wrap up with a couple quick comments here. We spent the past several quarters working to reestablish an attractive value proposition for both our equity and debt investors with consistent execution and prudent financial action. Our second quarter performance once again delivered on our commitment to capital efficient operations and an improved free cash flow outlook that is sustainable over time. With the Primex acquisition, we will put that model of execution to work on a complementary Delaware asset base that will elevate the value proposition for our shareholders through an expanded inventory for repeatable investment, several opportunities for operational synergy capture, and immediate deleveraging that will only accelerate from here with increased free cash flow on an absolute and per-sure basis. With that, operator, I think we're ready to open up for Q&A.

When I begin the question and answer session, to ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please step over your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. And then if you have others, please just rejoin the queue. This time we'll pause momentarily to assemble the roster. First question comes from Scott Hanold, RBC Capital Markets. Please go ahead.

Good morning, y'all. You know, congrats on the acquisition. Looks like a lot of heavy lifting to get this to where it is now. You know, just a high-level, you know, kind of question and observation, obviously. You know, when you look at this on the map, the acreage is, you know, more in the southern part of the Delaware. And, you know, if you just, you know, when we just do a kind of a poll of, you know, just well data, you know, it seems a little bit more mixed. You know, obviously what we see is not necessarily, you know, the answer to, you know, the quality of what you got. But can you speak to, you know, specifically those 300 wells? what gets you confidence that they compete in your inventory? And if you just could clarify, is that most of that stuff just Wolf Camp A and B? And can you maybe give us a little bit of a mix of that? Absolutely. This is Jeff Balmer. You're exactly right. It's primarily Wolf Camp A and Wolf Camp B. The acreage becomes a little more complicated from a seismic perspective and other things. But again, the Primex team has been an outstanding, very diligent and prudent operator in how they've approached things. And so the data that's been gathered, the initial development program, the initial thoughts on spacing and stacking are solid. So when we come in and roll this acreage acquisition into our own inventory analysis for all the wells that we have, all the way down to a contingent basis, It meshes up extremely well. And while normally you will have some well variability on individual well results, and that's to be expected, that distribution is going to be very heavily weighted to strong performing wells. And if you roll that again into our very robust full-scale development philosophy of trying to get everything when you're out there, right-sizing facilities, eliminating flaring, those kinds of things, it's an excellent acquisition.

And Scott, as a follow-on with that, what we've seen over time with their program with modifying completion designs and reducing profit and water loading, just like we've done, has improved over time. As you mentioned, the Wolf Camp A and B are the value proposition here, weighted to the Wolf Camp A. And while it's a large contiguous footprint, it's not like we're saying it Across the whole footprint, we're going to have both of those zones. We've spent a lot of time being very bespoke in picking sticks, so there's some parts of it that won't have two zones. And we did have an opportunity to lever, obviously, our regional knowledge, but also some of the seismic data as we were doing diligence here and incorporated that all into our learnings. But you see some of the well results that we've put into the deck are very strong, very oil-based. The bias obviously increases our Delaware oil production, which is great. And as Jeff said, something we don't see very often in these asset packages, there's a lot of one-off tests. There's a fair amount of co-development tests that were put in place in A and B, and that helped inform a lot of our type curves. They're just not working off apparent curves that you can risk them down appropriately. But even then, since they've developed it, in a way that's really in line with how we think about it, 75% of our locations are parent wells. So that's, again, something we usually don't see at this point of the cycle in the Permian.

Got it. Got it. And as you look forward and when you start thinking about 2022, and I understand this could obviously be, you know, too early to kind of, you know, delve into that too much, but conceptually, you know, I guess, you know, this will be sort of a, you know, a question maybe with you know a double question here but um is is the development plan going forward with this asset to sort of maintain the mix again say three to four acre wells on on you know legacy cal and acreage and a couple on this acreage and you know so what is the plan going forward how do you do the mix between legacy stuff and this stuff and then you know also do you guys you know see the ability to use your um expertise to enhance what they've already done

Yeah, let me start with the development philosophy and then let Jeff talk about enhancing completion designs and maybe some other synergy topics there. But from a development standpoint, look, this becomes part of our broader Delaware operation, right? It's going to get folded in. We're going to have benefits between moving crews across the entire footprint. But, you know, as we look at this, this is an asset that is going to compete for capital uh, is additive to across our inventory profile. So by definition, it's going to get its fair share of capital based on the reinvestment rates that we've talked about. Uh, so, you know, we've talked about 65, 75% corporate level reinvestment rate. That's about what's going to go into, into this asset base, but importantly, it's going to benefit from the broader Delaware integration. So I think I mentioned in the, in the prepared remarks, we're going to pick up a two rig program, uh, follow through on some of the things that they've been working on, and then it'll sort of morph into the broader Calend profile. But if you look at, you know, page 15 in our appendix shows about $250 million plus increase in EBITDA from our standalone scenario, $60 oil. CapEx, if you look at the implied CapEx between operating cash flow and free cash flow, goes up by $150 million. somewhere in that 60% type of ballpark that's going into this incremental asset. So I'll turn it to Jeff, and he'll talk a little bit about how we're going to make this better.

And the best thing about it is very similar to what Carrizo and Callen were able to do, is take two extremely efficient, motivated, and intelligent operations teams and companies as a whole, and you take best practices and ideas and creativity, and when we're looking at... The individual development programs, we work things on a pad by pad basis. Obviously, there's some regional similarities that come into play. But taking a look at spacing and stacking, trying to take into account existing wells, geology, petrophysics, how you propagate fracts, what water infrastructure and takeaway capacity you have. We've been extremely successful in lowering the amount of water and having these wonderful hybrid cracks that even within an individual well, we can modify the design within an individual well. So we anticipate learning a lot from what's already been done and combining that with the things that we've been successful with. So I'm very confident that this is a good match. Appreciate the color, guys. Thanks. Thanks, Matt.

Thank you.

The next question is from Neil Digman of Truist. Please go ahead. I think the three and a half rigs on the two. Yes, sir. You hear me?

Yeah, Neil, you cut out. If you could start at the beginning, it cut out when you first started your question.

Oh, sorry. I was just wondering, Joe, you'd mentioned three and a half rigs on the prior and then two rigs on the new. I'm just wondering if when you kind of look at the plan going forward in order to, you had a, obviously prior to the deal, and I think you would know probably including the deal, pretty nice pre cashflow plan. Um, will that include them five and a half rigs? And let me just stop there. I mean, can you give us an idea of kind of once that's combined, what you're kind of thinking as far as rigging and frack activity?

Yeah, we, We're going to run independent. Callen Independent would run about three and a half rigs. So for the back half of it, right now, Primex has two existing rigs that are taking care of some obligations and some delineation within the acreage. So the short-term plan is to continue that combination of that. We feel very strongly about the back end of the year from a free cash flow and overall capital performance. So that kind of remains unchanged. Again, it across the board, it's a really good fit. Um, so our, our initial program will be relatively straightforward of a, just a linear combination of, of both companies.

Okay. And then just one last one, just kind of double if I could on, on, on the deal and the assumptions certainly appears that given the, the, the cashflow or the production that you're picking up, you'd see on your, your free cashflow, I guess, sort of forecast, but I'm wondering based on kind of the way you guys and Liam and everybody was running the numbers, Does that assume you do something with the 440 that's put on the revolver? And then I'm just wondering on that and the Cambridge deal, is there any sort of lockup? Thank you.

Yeah, this is Kevin. Thanks, Neil. So on the 440, the assumption right now is that we will put that on the revolver and opportunistically look for potential capital markets opportunities to maybe term some of that out. but we do feel very comfortable putting that on the RBL and be able to pay down that through a combination of free cash flow over the coming quarters as well as other potential divestitures in our program.

In terms of Kimmeridge, they do not have a lockup similar to where they stand today, but the Primex selling shareholders that will receive stock in Calendula have a lockup. Very good. Thanks, guys. Congrats on the deal.

Thanks, Neil. Thank you. Next question is from Derek Whitfield of Stifel. Please go ahead.

Thanks. Good morning, all, and congrats on your update and creative transaction. Thanks, Derek. Perhaps for Joe at a high level, could you comment on how this acquisition opportunity came together?

Yeah, I guess I'll go back. in time, this is actually an opportunity that I discussed with Primex going back three or four years ago, sort of a similar type of a concept in terms of an equity type of driven transaction. We were both growing companies at that point and saw some benefits as we were establishing our position in the Delaware. Things didn't work out at that point, but certainly if kept an eye on how they're progressing, as Jeff said, made a lot of progress. So I think it's a matter of staying in touch over the years is obviously helpful in building those types of relationships. But, you know, we have been looking for opportunities and we've been very clear about this. You know, can we find opportunities to bring in great assets that will continue to drive the value proposition for Callen? as well as align them with great financial outcomes. And, you know, we've looked at several things that didn't match that Venn diagram. This is one that did and overlay that relationship and that dialogue and sellers that saw a great opportunity to take back stock and the combined entity and things come together. These aren't easy to put together. So it's been many months of work to do this, but hopefully it gives you a flavor of how this all came to fruition.

That's great, and then as my follow-up, I wanted to focus on the midstream side of the acquisition. So, with regard to Saragosa, could you speak to the value assigned to this in your acquisition price and comment on the opportunity you see to increase third-party volumes?

Yeah, I can't specifically address the value assigned. Certainly, there was a value assigned. Now, maybe talk about what this is. There's a good footprint of gas gathering and gas lift services that this provides to the wells, both us and our working interest partners. There's a field gas supply component that delivers field gas to the drilling rigs, frack crews, so there's some really good savings there versus diesel and also reduce our emissions. Freshwater supply, that's the Cerro Goso, water wells, frack ponds, water distribution pipelines, about 100,000 barrels of water a day capacity. That's where there's certainly some third-party revenues there that's pretty decent, and we're going to look to potentially build on that. As you know, we've been way ahead of the game on water and managing that the right way over the last few years. We've built on a water recycling business in the Delaware. This is going to more than double that. So we're going to look for opportunities now, but, you know, there's no specific number that I can give you that there is a value proposition here, not only today, but potential to build on that going forward. Very helpful and great update and acquisition.

Thank you.

Thank you. And the next question comes from Phillips Johnson of Capital One. Please go ahead.

Hey, guys. Thanks, and congrats from me as well. It sounds like you're assuming a two-rig program on the Primex asset throughout all of next year for about $150 million or so of CapEx. Just wanted to ask how many gross and net wells that assumes for next year, and is that a maintenance type of program, or is there a little bit of sort of growth exit to exit?

Yeah, Phelps, there's a – a little bit of growth. I mean, it's fairly modest. We talked about over the 21 to 23 type of timeframe, looking at, you know, four-ish, 5% type of growth over that timeframe on a compounded annual growth basis. But there'll be a little bit of growth in 22. Obviously, we need to get these integrated, further optimize the plan from here. In terms of gross and nets, I don't think we're in a position to provide that until we really pin down the formal budget We feel great about what we put out there. I'm hopeful we can do even a little bit better that's out there, but that might mean moving some wells around, and that might change the gross in that. So I don't want to put a marker out there that might change.

Yeah, okay. And then, Joe, once you guys have digested this deal, do you think you'll be actively seeking additional deals like this that can also move the needle and, you know, provide some accretion on free cash flow, leverage ratio, and some of the other metrics?

You know, I don't think that active is necessarily the word. I think in a world that is going to be characterized by continued consolidation, in my opinion, it's just part of the business. And, you know, day to day, we will continue to look at opportunities that we can find similar situations where we can add great assets, overlay our expertise and knowledge base, deliver synergies, make them better. deliver those types of operational results plus financial outcomes that are going to further our deleveraging plans, get us further down the path to being squarely below two times, get us in a position to be thinking about how we potentially return capital to shareholders. I wouldn't say that's active or passive. I think it's just part of what we do every day as an operator and what everyone should be doing in a world that's going to continue to consolidate.

Yeah. Okay. Sounds good.

Makes sense. Thank you.

Thank you.

And again, if you have a question, please press star, then one.

Next question comes from Gabe Dow. Colin, please go ahead.

Hey, good morning, guys, and congrats on the two transactions here. I was hoping, Joe, maybe we could just touch on how the pro forma asset base stands from a divestiture standpoint or divestment standpoint moving forward, whether it's um, continued sales of non-core upstream, or now that you're obviously much bigger, uh, on the midstream side, does that open up more opportunities for, for midstream, uh, you know, potential midstream JV, just, just any thoughts around divestitures moving forward would be helpful.

Sure. Well, as you, as you know, we're, we're active, uh, on that front as we speak, um, with a few processes going on that, uh, we hope to bring some closure to in the not too distant future. You know, the A&D market has certainly gotten better. Pretty low bar, I guess, to judge against, but it is getting better. Things take a little bit more time than what we've experienced historically, so we're making sure that we canvass the entire group. In my mind, we're going to take the results from those processes and digest what's the right asset for this type of a market, go back through the combined footprint, see if there's additional opportunities. We're focused on getting to our goals that we put out there for this year first. But we will continue to assess other pruning opportunities. And I think with a transaction like this, it's a natural catalyst to take a step back and say, what else can we do beyond what we had on a radar screen before with the new combined footprint with capital priorities and allocation? Maybe there's some additional assets from a working interest standpoint that could be put in the mix later this year or next year. On the midstream side, yeah, no, it's a pretty big boost to our midstream presence and asset base. We're evaluating some of those alternatives that may be enhanced in terms of divestitures or JVs or some of the things that we've talked about. We just got to get this to the finish line and start thinking about maybe there's a path forward on a broader midstream monetization or structure, but it's a little too early for that.

Got it. Thanks, Joe. That's helpful. And then just as a follow-up, in the press release you'd mentioned, the acquisition could accelerate capital return to shareholders. Just curious how you think about that against where the balance sheet is today and Is there a net debt target that you want to get to or an absolute debt target that you need to hit? Just curious how those two play out moving forward as well. Thanks, guys.

I'll start with this. I'll turn it over to Kevin to talk about maybe some of the financial parameters. Right now, I think we have a clear value proposition. We have a phenomenal enterprise value proposition for shareholders. In the near term, it's taking some of that value value from debt holders put in the equity holders' pockets from paying down debt. So I think it's very clear, and this only accelerates that mandate that we've had in terms of how we're delivering shareholder value in the near term. But we are thinking about, okay, with this type of free cash flow generation on this new platform is substantial, and I think our leverage starts moving down. dramatically. And maybe, Kevin, you want to talk a little bit how we think about decisions?

Yeah, so I think the key part of that press release is the rest of that sentence, which is before reaching less than two times net debt, there's probably not a discussion about this point. The point is this transaction helps bring forward the timetable by which we reach that less than two times net debt metric. I would say overall, our goals are still focused on that balance sheet, reducing overall debt levels, increasing maturity runway, giving ourselves more liquidity, reducing overall interest burden. We're still very much targeted on those elements. We do like the fact that out of the gate pro forma Q2, this takes us down almost a half a turn or more. of leverage, and by the end of 2022, on planning prices, this takes us down about 0.4 turns. So this dramatically improves our leverage profile and accelerates the timetable by which we can actually talk about those shareholder returns.

Understood. Thanks, guys. Thanks, Gabe.

Thank you. And the next question is from David Eichmann, Pickering Energy Partners.

Please go ahead.

I'm getting mergers done. It definitely takes a lot of time. I appreciate that more. Sorry, David.

We missed the first part of your question. Yeah, cut out.

Oh, no worries. Just congratulating you all on getting mergers done. I'm sure it's a lot of work. When we were looking at your parent wells on the assets, it looks like their cumes are a little better than what you all have had historically in more full field development. Can you talk about as you take these assets into full development, should we expect kind of a 10 or 20% less cume than what the initial wells have been as we pulled public data? Or what should we expect?

Yeah, I'm not going to get tied down to a percentage because, of course, there will be a distribution. Anytime you come out to more of a greenfield area and you have a handful of apparent wells or you're not competing for hydrocarbons, Generally speaking, you're going to see a higher initial EUR from some of those early wells and would expect some modest degradation over that over time. And so I think that that's a very fair statement. The nice thing about it is sometimes geologic complexity can work in your favor. For instance, there's some areas within Cowan's existing acreage where There may be a possibility of some lower zones where you don't necessarily have to get them right away and you can come back later because they're not geologically connected to the wells above them. I'm not saying that's the case here with the Primax acreage, but you will see very, very strong returns and very, very strong capital efficiency throughout the whole robust development program that we're going to, again, springboard off of what's already in the ground. So I would anticipate strong results across the board.

And we're pulling and getting like a mid-30s base decline on a BOE basis. Is that reasonable if we just take them and let the existing PDP decline? That's right.

Yeah, I think that, you know, especially if you take a well that's kind of revealed itself and is dropped into pseudo steady state flow, It is going to be what it's going to be. If you go in and you neighbor it up improperly, you'll change that quite a bit, going the wrong way. But I think we've proven that our programs that we put in place around surrounding wells are, again, very profitable. That's helpful. Thank you all.

Thanks, Dave.

Thank you. The next question is a follow-up from Scott Handel, RBC Capital Markets. Please go ahead.

Yeah, thanks for bearing with me for one more here. Just a quick question. Obviously, you guys have your sustainability report out, I think, a week ago that shows some pretty stark, dramatic improvements as you kind of pull together Callen and Carrizo and obviously take the best practices. Now, when you step back and look at these assets you're getting with Premex, how does this fit into – you know, the ESG story. Is there, you know, do you have an idea of like where they are, you know, relative to your current asset base? We do. And of course, you know, the proof is in the pudding and the discovery when we physically, you know, have an opportunity to integrate the assets and get out there. But I think more importantly, the philosophy that Primex has is very complementary to where Callen is existing relative to, I mean, you look at a, a relatively small operation that's 80,000 barrels of water recycling capacity. That's outstanding. If you look at some of the opportunities and growth that the industry has, and that, frankly, Callen and Primex will have relative to our reduction in flarings, recordable incident rate, you know, prevention of an acknowledgement that, you know, You know, the combined practices of both companies can improve ESG or in particular safety and emissions across the board. Again, I think from a cultural fit, it's exemplary. So I would anticipate that to continue.

And Scott, I think, you know, said it in another way and sort of in line with what we've put out there in terms of our goals on flaring volumes and GHG emissions. This asset base is completely aligned with that. you know, as we evaluate not only Primex, but, you know, did other acquisitions, that this is a key criteria, right? When we're going through our diligence, this is a big part of how we look at asset bases. So, you know, there's always work to do to get improvements, as Jeff talked about, whether on Primex or our own asset base. But overall, this isn't going to knock us off any of our goals and hopefully even get us in a position to do better.

Got it. Got it. Okay. So, you know, at least as good and hopefully over time, you know, continue down the path of getting better.

That's a fair statement. Yep. Thank you. Thank you. And again, if you have a question, please press star then 1.

This concludes our question and answer session. Now I'd like to turn the conference back over Mr. Joe Gatto, President and CEO, for closing remarks.

Thank you for that, and thanks, everyone, for joining. It's an exciting day here. Some good discussion, good questions. Obviously, reach out. If there's any more, we put a lot of information out there a little later than we had hoped last night, but we're around to answer questions, and we'll look forward to updating you in a few months on the progress on the acquisition and just our operations with Callen. Thanks again.

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