Callon Petroleum Company

Ladies and gentlemen, welcome to the Callen Petroleum first quarter 2023 earnings conference call. Currently, all participants are in a listen-only mode. After the company's prepared remarks, there will be a question and answer session. Please note that each caller will be limited to one question and one follow-up question. Just a reminder, today's conference call is being recorded. To ask a question during the Q&A session, press star 1 on your telephone keypad. To withdraw your question, press star 1 again. I will turn the call over to Callan's Head of Investor and Relations, Kevin Smith. Please go ahead, sir.

Thank you, Mallory, and good morning, everyone. I am joined by our CEO, Joe Gatto, our COO, Jeff Ballmer, and our CFO, Kevin Haggard. During our prepared remarks today, we will reference our release on the first quarter and our recently announced Permian Eagle for transactions, as well as supplemental slide decks related to both. All these materials are available on our website at www.callan.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 SEC filing. We will also refer to some non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measures referenced, we provide a reconciliation to the nearest corresponding GAAP measure in the appendix to our slide deck and in our earnings press release, both of which are available on our website. Following our prepared remarks, we'll open the call for Q&A. I will now turn the call over to Joe Gatto.

Thank you, Kevin. Good morning, everyone. We are thrilled to have you with us today on this very exciting day for Callen. We delivered another strong quarter performance, highlighted by improved Permian cycle times and continued debt reduction. I'll cover the first quarter highlights later in my remarks, but we are off to a great start in 2023. I'll spend most of my time today discussing our creative and transformative transaction in the Delaware basin. Simply put, this deal is a great fit for us. It solidifies our focus and positions us as a leading operator in the Permian with more than 145,000 net acres and 107,000 BOA per day of production. It's contiguous with and complements our existing Delaware position where we have proven history of adding value. And these high quality assets will be seamlessly integrated into our development model and will immediately compete for capital within Callen's broader Permian portfolio. The cash portion of the transaction, totaling approximately $265 million, will be funded with the sale of our Eagle Ford position for $655 million in upfront cash. The transactions will be accretive to our absolute leverage and credit metrics. Our strengthened balance sheet achieves our initial debt reduction milestone, allowing us to launch a share buyback program upon closing. Let's take through some more of the deal highlights. We are adding 18,000 net acres and about 14,000 barrel of oil equivalent per day of production from oil assets that sit contiguous to our core Delaware acreage. We are gaining a larger footprint in the Permian and increasing the critical mass of our operations. This will create opportunities for further capital efficiency improvements and economies of scale. This deal extends our decade-long Permian inventory of high-return, oil-weighted drilling locations. We are adding 70 operated long lateral locations of which 90% have a positive PV10 at $45 oil. These locations are in the well-established third bone shale, Wolf Camp A and Wolf Camp B intervals with additional potential in both shallower and deeper zones. This contiguous acre position with stacked pay horizons sets up perfectly for the application of our proven life of field co-development model. Today's earnings deck highlights sustained well productivity benefits across our asset base in both the Delaware and Midland basins that are driven by this model. These transactions will improve our operating margins due to a similar proforma oil weighting and lower LOE per BOE. We have also identified more than $10 million in annual G&A savings and are confident that we will find other cost-saving opportunities through the integration of the assets. This deal is priced right at 2.5 times EBITDA and provides an efficient way for us to exit the Eagle Ford. And it's highly accretive to key financial metrics, including a 15% uplift to adjusted free cash flow in 2023 and a 55% increase in 2024 at recent strip commodity prices. It also improves free cash flow per share by 10% in 2023. And after a full year of integration and synergies, 40% in 2024. Per-share metric accretion has the opportunity to further improve, even before share repurchases, since the number of shares issued to the selling parties decreases to the extent that Callen's 20-day VWAP is above $32.50 at closing. And importantly, we will focus 100% of our capital and operational teams on the Permian. This will yield stronger well-level economics, enhance flexibility in project scheduling, and improve cycle times. Together, this will reduce our reinvestment rates and increase the conversion of EBITDAX into free cash flow. The bottom line, we will generate more free cash flow with our investment dollars through significant capital efficiency gains and cost savings as a focused Permian company. From our forecast, you'll see that 2023 production will be relatively unchanged with the lower capital spend, despite the fact that we are selling more current production than we are buying. Looking to 2024, we expect production to grow at a low single digit rate year over year as contributions from the newly acquired assets increase. The final point I'll make is the culmination of everything that I've covered on this call and perhaps the most important. As you know from recent conversations, reducing debt and initiating a shareholder return program are our top objectives for 2023. These transactions get us there on both counts. Upon closing, our debt will be reduced by more than $300 million to approximately $1.9 billion, below our $2 billion initial debt milestone. We will continue to focus on deleveraging and see substantial progress in 2024 towards our optimal debt target of less than $1.5 billion and leverage below one times. Subject to closing, our board has approved a $300 million share buyback that we plan to execute over a two-year period. We believe that Callan's intrinsic value proposition which will be significantly improved by these accretive transactions, is not reflected in the public market valuation, creating a very compelling case for a repurchase program moving forward. Before taking your questions, let me quickly give you the main takeaways from the first quarter. First, we are executing extremely well. Our first quarter financial and operating results were in line or better across all key metrics. This gives us high confidence in our ability to deliver on our 2023 business plan. We are also maintaining our focus on capital discipline and balance sheet strength. We generated $7 million in adjusted free cash flow for the quarter, allowing us to realize our 11th straight quarter of debt reduction. Second, our life of field co-development model is differentiating Callen from the pack. We provided a great deal of insight into this model last quarter and had discussions with many of you on the road over the last few months. We've implemented this model consistently over the last five plus years, and it underpins our longer-term asset value proposition. Third, we are seeing significant operational improvements. These gains are owed to scale, larger project sizes, and deep knowledge and experience within our teams. We are drilling wells faster, pumping more completion stages per day, and using multiple rigs and completion crews on single projects. Increased DNC efficiencies, combined with our focus on simultaneous drilling and completion operations, are rapidly reducing cycle times and increasing capital efficiency. All these factors contribute to strong momentum for our production outlook. We forecast that our second quarter production will be up over 5% to 105 to 108,000 VOE per day. We've updated our 2Q guidance in today's materials and have also provided updated guidance for 2023 that assumes six months of impact from the transactions. In closing, know that our results year-to-date are strong and in line with our top priorities of investing in premier assets, generating free cash flow, and reducing debt. Today's transaction fits us perfectly, both financially and operationally. Financially, it allows us to achieve our near-term debt milestone and launch a share buyback program this year. Operationally, it solidifies our focus on the Permian Basin. Similar to past acquisitions, we are highly confident that our life of field co-development model will allow us to add significant value on our new acreage in the Permian and enhance our cost structure and capital efficiency outlook. And finally, I'd like to personally thank our talented Eagle Ford employees for their commitment and hard work. They have done an exceptional job operating safely and efficiently and have consistently made valued contributions to Calum. This concludes our prepared remarks. We're now happy to take your questions.