Callon Petroleum Company

Ladies and gentlemen, thank you for standing by and welcome to the Kellan Petroleum fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please note that each caller will be limited to one question and one follow-up question. To ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Smith, Director of Investor Relations. Please go ahead, sir.

Thank you, Regina. Good morning, and thank you for taking the time to join our conference call. With me on today's call are Joe Gatto, President and Chief Executive Officer, Dr. Jeff Ballmer, SVP and Chief Operating Officer, and Kevin Haggard, SVP and Chief Financial Officer. During our prepared remarks, we may reference our fourth quarter and full year earnings press release, our 2023 outlook news release, and our supplemental slides, all of which are available on our website at www.calend.com. Today's call will include forward-looking statements that refer to estimates and plans. Actual results could differ materially due to risk factors noted in our presentation and in our periodic SEC pilots. We will also refer to some non-GAAP financial measures which we believe helps 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 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. I would now like to turn the call over to Joe Gatta. Joe?

Thank you, Kevin. Good morning and welcome, everyone. We have a lot of good news to share with you and are excited about our plans to unlock the tremendous value we see in Calend today. By now, I trust you have had a chance to review our two press releases issued last night, one detailing our Q4 results and the other, our 2023 outlook. These are accompanied by other supplemental disclosure slides on our website. We will reference a few of these slides in today's call, but encourage you to review the entire package to provide background for questions. As demonstrated in our fourth quarter and full year 2022 results, we had a strong finish to the year on the production front, despite periods of adverse weather conditions, and we're right on the mark with our capital spending forecast. Looking forward, our 2023 business plan is designed to capture capital efficiencies through larger-scale projects that we expect to deliver solid returns and help offset industry-wide inflation, ultimately creating value for our shareholders through reinvestment in our high-quality inventory. We are eager to address your questions, so we plan to keep the prepared remarks relatively brief today. The call today will be divided into three buckets. First, I will outline our key objectives for 2023. We are confident that our 2023 development plan will drive significant free cash flow, clearly demonstrate improved efficiencies through continued application of our life of field co-development model, and enable us to further reduce debt balances. We'll move to a brief summary of our fourth quarter and full year 2022 financial and operational highlights. And lastly, I'll discuss our capital allocation framework and some important updates on our path to returns of capital. Let's get started. Our top priorities in 2023 are pretty simple. Invest in our premier assets to generate free cash flow and pay down debt. To the last point, our track record of strengthening the balance sheet has been outstanding. Since the first quarter of 2021, We've improved our leverage ratio by more than three turns, or over 70%. Overall, we anticipate investing approximately $1 billion this year, with more than 80% of our DNC activity allocated to high-return Permian Basin projects, which are expected to generate average IRRs of approximately 70% and average payouts of less than two years. Callen has a premier asset base with an inventory of over 1,500 risk locations and core zones, representing over 10 years of locations that are economic at $60 per barrel or lower, and that's assuming current service costs. We are fortunate to be positioned with the quality asset base we possess today, which is the result of many years of important decisions related to building our team and the development strategy we have employed on our multi-zone asset base over time. Our life of field co-development model has been a key tenant of Callen's operations going back several years as we built our position in the Midland Basin, and that philosophy carried with us into the Delaware Basin upon our initial entry in 2017. While co-development is not unique to Callen, we are part of a select group that has adhered to this strategy over time. This is a critical point. The power of the model comes from the cumulative impact of consistent application over time, ultimately creating an inventory with more consistent quality into the future and maximizing the MPV of the resource base. Focusing on one element of our development model, will continue to increase the average number of wells targeted within our projects this year co-developing multiple zones to mitigate risks associated with parent-child well interactions and balancing today's well productivity with tomorrow's value proposition in addition to the subsurface optimization there are also economies of scale that translate into dnc savings in 2023 our average project size will increase by over 20 percent importantly As our development program has achieved critical mass and we've established a solid ongoing duck inventory, we can increase the use of simultaneous operations to reduce our cycle times. We estimate that our simultaneous D&C activities will reduce cycle times by approximately 20%, which significantly improves capital efficiency, even as larger project sizes are used. On the cost savings front, Our scale program has been instrumental in limiting the inflationary increase in our DMC cost per foot to roughly 10% year over year. I ask you to now take a look at slide 10. This is a powerful chart that really captures the perspective impact of our life of field focus and the implications for sustainable pre-cash flow generation. Over the next five years, we expect that our annual capital efficiency metrics, as measured by total capital invested divided by total average daily production will be consistent and directly improve on average under the development scenarios captured. This dynamic is underpinned by a couple key drivers. In terms of wedge production from new drilling activity, which is the production that is incremental to established base production, we expect to benefit from the relatively consistent return profiles of new co-development projects, as discussed earlier, improve project cycle times from the ongoing use of simultaneous operations and optimization of project sizes over time, and leveraging of past facilities investments as we return to previously developed areas. In addition, capital efficiency will benefit from the maturing of our corporate P2P decline profile over time. Clearly, this type of analysis represents a point-in-time outlook with several underlying assumptions and resulting outputs, but I want to make sure there's one key takeaway. The capital efficiency profile embedded in our current inventory provides differentiated flexibility for meaningful capital allocation to what we envision as the three key drivers of shareholder value going forward. Disciplined investment and a high return inventory, ongoing debt reduction, and an impactful return of capital program. Let me switch gears and cover our fourth quarter and full year 2022 financial and operating results. For the fourth quarter, Total production averaged 106,000 barrels of oil equivalent per day, and oil sales averaged just over 66,000 barrels per day. Both were in line with expectations, despite weather impacts we experienced from winter storms around year end. For the year, our 2022 production increased by about 9% over 2021. We generated $412 million in adjusted EBITDA and posted adjusted net income for diluted share of $3.36 during the fourth quarter. Our results were driven by strong well performance and the continued strength of both oil and natural gas realizations. We realized 102% of NYMEX WTI during the fourth quarter, owing to our close proximity to premium Gulf Coast markets and contracts tied to Waterborne and international pricing. Of particular importance, 2022 marked the third consecutive year that we posted improvements in EBITDA margins. Our work-to-control costs through supply chain efficiencies, LOE reductions from the Primex acquisition, and strong price realizations has helped us enhance margins and mitigate industry-wide inflation. Overall, our cash operating costs during the fourth quarter were in line with expectations, with LOE per BOE down 2% sequentially and cash G&A in line with the previous quarter. Proved reserves at year-end were approximately $480 million BOE, of which 57% were oil and 85% weighted to the Permian, with an associated PV10 value of $10.5 billion. During 2022, we added 68 million BOE from extensions and discoveries, which represented 180% of 2022 production. As a result, approved developed reserve volumes grew by 7% over 2022 to approximately 295 million BOE, with an associated PV10 value of $7.1 billion. Said another way, The PV-10 value of just our approved developed reserves represents over $75 per share in equity value after deducting debt balances. We get a lot of questions from shareholders regarding our capital return strategy. Our answer has been consistent. Let's make sure that we have addressed the balance sheet first and not declare a victory too soon. We made tremendous progress on this front, which was recognized in credit rating upgrades from all three agencies in 2022. We reduced our debt by $462 million last year and by more than $715 million since the start of the first quarter of 2021. In sum, the balance sheet is very close to being in a position for us to implement a return of capital program. But before I address this further, let's take a step back and start with a few points on the broader allocation of the cash flow generated from operations. Callen has a deep and robust inventory development projects, and an outlook for improving capital efficiencies as evidenced by the stats around our 2023 capital program. Reinvestment in our assets is the cornerstone of our strategy and discipline capital allocation into an asset base with consistent return profile that provides confidence in our ability to generate sustainable free cash flow. Given the high returns and quick payouts on our portfolio of investments, we expect to generate a significant amount of free cash flow for allocation to an expanded set of shareholder value initiatives. Based on the assumptions detailed in the presentation, we expect to generate more than $2.75 billion of free cash flow over the next five years under our baseline development scenarios. As a frame of reference, this amount of free cash flow represents approximately 125% of our equity market cap and over 60% of our total enterprise value today. The next logical question is how will we deploy this free cash flow? We expect to achieve our key $2 billion debt milestone later this year. which is now our only gating financial metric to achieve before adding a return of capital program. So this element will now squarely be part of our broader capital allocation framework. And as to the form of this program, based on our equity value today and our desire to retain financial flexibility, we believe the highest return proposition for execution of a capital return framework for shareholders is a stock repurchase program. In addition to capturing the value arbitrage between our public market valuation and our internal view of intrinsic value, share repurchases will enhance production growth per share beyond our organic potential and also increase per share exposure to our strong inventory position. And to front run the question, we will be detailing elements of this program as we get closer to formal initiation. I want to make one last point here and refer you to page eight of the materials and the checklist on the left-hand side of the page. Just to be clear, even when we reach $2 billion in debt and commence capital return initiatives, debt reduction will continue to be a key priority for our free cash flow deployment with an eye towards achieving less than $1.5 billion of gross debt and a leverage ratio of less than one times. Before taking your questions, I'll summarize what we believe are the key ingredients for Calend to warrant a premium valuation. A deep and high-quality inventory that contributes to an improving capital efficiency profile over the next five years of development. Our life-of-field co-development model that has been consistently followed over the past several years differentiates our longer-term asset value proposition. A solid plan to attain our $2 billion debt milestone and commence the return of capital to shareholders later this year that will complement further debt reduction. And a successful integration of ESG initiatives and targets across the business which tie to compensation to incentivize right behaviors. Overall, we are confident that the execution of our plan will close the significant valuation gap we see in our equity today. This concludes our prepared remarks, and we are now happy to take your questions. Operator, we'll turn it back to you.