Callon Petroleum Company

Welcome to the Cowan Petroleum Company's third quarter 2021 earnings and operating results conference call. 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 would now like to turn the call over to Mark Brewer, Director of Investor Relations, for opening remarks. Please go ahead, sir.

Thank you, Debbie. Good morning, and thank you all for taking the time to join our conference call today. With me this morning 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 may reference the earnings results presentation and third quarter earnings press release, both of which are available on our website So I encourage everyone to download both documents if you haven't already. You can find the slides on our events and presentations page and the press release under the news headings, both of which are 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 presentation. 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 violence. We'll also refer to 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 can find these reconciliations in the appendix to the earnings presentation slides and in our earnings press release, both of which are available on our website. Following our prepared remarks, we will open the call for Q&A related to both quarterly results and forward-looking performance. And with that, I would like to turn the call over to Joe Gatta.

Thanks, Mark. I encourage everyone to take a look at the earnings presentation on our website as background for our introductory remarks. Let me start out by saying that the third quarter was a clear demonstration of us walking the talk. Top line production exceeded recently increased guidance with productivity gains from both new and existing wells in the Permian Basin. This outperformance dropped directly to strong bottom line free cash flow as operating expenses and capital continued to benefit from our focus on best practices and realized efficiencies. Capital spending for the quarter came in at $115 million below the bottom end of guidance, which was also lowered with the recent guidance update. Operational expenses remained in check and contributed to the strongest operating margins we have seen in some time at more than $45 per barrel of oil equivalent, a 20% increase from the previous quarter and at the leading edge of third quarter earnings releases. Our operations team made strides on numerous project fronts, lowering our overall LOE run rate while also reducing our environmental footprint. Our near-term focus is simple. a scaled co-development model across a diversified portfolio of core investment opportunities to drive rapid deleveraging from leading cash margins. This focus is best exemplified by an expected reduction in our net debt to EBITDA to under two and a half times by year end. This progress reflects a leverage improvement of two turns since the first quarter, which is amongst the best rates of change in the industry. Importantly, through thoughtful co-development of our resource base, We maintain a life of field development view that preserves longer-term inventory quality and depth, supporting capital efficiency and free cash flow sustainability over time. We recently completed a strategic consolidation transaction in the Delaware Basin, increasing our footprint to 110,000 net acres in the basin. The acquisition of the Primex assets, which we announced along with our second quarter earnings, closed at the beginning of October, and we are well on our way with the integration process. We have been very pleased with recent results from the properties as activity resumed at the beginning of the year targeting two primary zones, new generation completion designs, and refined landing zones. Early time productivity has been evident with average peak oil rates of over 1,200 barrels of oil per day across 19 wells in the Wolf Camp A and B. And longer term performance has also been attractive with 180 day average cumulative oil production of approximately 120,000 barrels of oil which represents over 72% of the hydrocarbon mix on a two stream basis. While we won't have the chance to incorporate Calend's completion designs into new wells until later this year, we've been able to use our more conservative flow back strategy on a recent three well project in the area. The combined well package is responding favorably to the modification with all three wells performing ahead of the project type curve to the first 20 days online. In addition, We are currently transitioning development on the acquired assets to the Callen philosophy of scaled co-development. This transition is currently focused on building an inventory of drilled wells to support larger average project sizes, with our initial three projects in 2022 slated to average six wells apiece. As we look a little deeper into 2022, the large majority of our development program will focus on both the Delaware and Midland basins, with the Eagleford returning to more of a supporting role. We've talked at length about the optionality that our diversified portfolio offers in terms of cash conversion cycles and returns on capital, but we were unable to fully optimize investment in the Delaware Basin over the last two years as we focused on shorter cash conversion cycle projects. The scale and scope of our Permian position and associated core inventory of over 1,100 locations in the Delaware alone enable us to establish a durable program that builds on substantial project level returns on capital to support a robust free cash flow profile through mid-cycle commodity pricing. Despite the significant uplift we have seen in the forward curve for oil, we intend to maintain our capital reinvestment framework based on more conservative planning prices that reflect a longer-term outlook and focus on continued simplification of the capital structure and deleveraging on both the net debt to EBITDA and absolute debt basis. Since the second quarter of 2020, We have laid out plans and consistently executed on strategic financial initiatives that have dramatically changed our outlook and allowed us to get back on our front foot. As part of that execution, multiple non-core monetizations have produced cash proceeds of roughly $210 million in 2021. We expect that these last few transactions announced since early October, including a smaller monetization of select water disposal assets, to close by year end, which will put us near the top end of our guidance range of $125 to $225 million of proceeds for the year. These proceeds, combined with our 2021 free cash flow generation expectations, have established a tangible path to bring leverage under two times by mid-2022 and subsequently drive to our next round of targets of debt to EBITDA below one and a half times and absolute leverage of under $2 billion. Given this trajectory, in addition to our focus on sustainability and the importance of controlling critical operations in our core areas, We believe that retaining our larger portfolio of water gathering, recycling, and disposal assets provides the greatest value proposition for our shareholders. As such, we are not pursuing additional monetizations related to water assets at this time. Building upon that theme, advancing environmental sustainability has become a critical piece of the conversation

Excuse me. At this time, bear with us for a moment while we fix audio. Thank you.