Coterra Energy Inc.

Good day and welcome to the Cotera Energy third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Katerina Papadetropoulos, Investor Relations Analyst. Please go ahead.

Thank you, Matt. Good morning, everyone, and thank you for joining Cotera Energy's third quarter 2021 earnings conference call. During today's call, we will reference an updated investor presentation, which can be found on the company's website. Today's first pair of remarks will include a business overview from Tom Jordan, CEO and President, and Scott Schroeder, Executive Vice President and CFO. As a reminder, on today's call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures. Forward-looking statements and other disclaimers, as well as reconciliations to the most directly comparable GAAP financial measures were provided in this morning's earnings release, which can be found on our website. Following our prepared remarks, we will take your questions. Please limit yourself to one question and one follow-up. With that, I'll turn the call over to Tom.

Thank you, Katarina. and thank all of you for joining us on this morning's call. I'll make a few introductory remarks followed by Scott who will walk us through third quarter financials and fourth quarter guidance. We have quite a crew in the room today and I just want to make sure you know who is in the room because we may be directing questions to them given the complexity of our release. Blake Sergo is here for operations. Dan Guffey is here for financial planning and analysis. We have Todd Raymer, our Chief Accounting Officer. We have Matt Caron for Finance and other overarching business issues, including marketing. And, of course, Scott, who will be making some prepared remarks. The closing of the Cabot and Semerex merger occurred on October 1. As a result, Legacy Semerex will not report third quarter financials. I'm pleased to report that Cotera Energy is well underway with the integration of our two legacy companies. As you can imagine, a merger of equals between Simerex and Cabot is not an easy task. We've been full court press since May. We have functional teams working around the clock to integrate accounting, information systems, production reporting, safety protocol, land systems, operations, marketing, legal, and human resources. Each of these teams are tasked with identifying and implementing best-in-class systems and processes. Our approach is all Cotera, all go forward. That's not the way we've done it here is not an acceptable answer. We've made great strides and we'll hit the ground running as we head into 2022. I want to salute our exceptional people from both legacy organizations who are coming together to form a new, better Cotera from two outstanding legacy companies. We all share an enthusiasm and commitment to create the very best DMP company in our industry. I have great confidence that we will exceed our lofty expectations. Speaking of confidence, this morning's announcement that we are accelerating our first variable dividend underscores and demonstrates this confidence. Cotera is built to deliver superior financial returns through the cycles. This morning's announced base and accelerated variable dividend totals a combined 30 cents per share. Coupled with the 50 cent special dividend we paid on October 22nd, the company will return 80 cents per share during the fourth quarter. As these moves demonstrate, we are committed to our owners. Cotera owners benefit from assets that are second to none, a pristine balance sheet, and asset diversity that will sustain and preserve our cash flow through commodity cycles. Our owners also benefit from our ongoing discipline to allocate capital to its most productive use and continually challenge the status quo. Although Cotera is barely one month old, we have some excellent operational results to discuss this morning. On a pro forma basis, Cotera produced 645,000 barrels of oil equivalent per day, including 81.5 thousand barrels of oil per day during the third quarter. As promised, we are on track to exit 2021 with oil rates that are 30% greater year over year compared to fourth quarter 2020. We brought 61 wells online during the quarter and are currently running seven rigs and will average four completion crews during the fourth quarter. Five of our rigs are in the Delaware Basin. Two rigs are in Susquehanna County of Northeast Pennsylvania. We benefited nicely from higher commodity prices during the quarter. This was true across the board. Oil, gas, and natural gas liquid prices were significantly higher during Q3 and have continued to strengthen. More on that later. We continue to see excellent productivity and deliverability from our Northeast Pennsylvania assets. Slide eight in the investor deck we posted this morning highlights our ongoing activity level and sustainable production volumes in Northeast Pennsylvania. Our Pennsylvania operation is impressive on all fronts. We continue to make remarkable drilling progress and are bringing projects online faster than predicted. Faster drilling has meant that we can drill more wells with the same number of rigs, resulting in four additional wells drilled during 2021. When acceleration occurs owing to operational excellence, it's a nice problem to have. We're also moving seven additional completions into late fourth quarter 21 from early 22, pushing our planned Marcellus capital slightly above the upper end of our previously issued annual guidance range. As a result, we will have additional volumes coming online around year-end to take advantage of strong Appalachian winter pricing. We continue to see a significant increase in capital efficiency in our Delaware Basin assets. Slide 9 of our investor presentation highlights recent development projects in Culberson County. As we previously discussed, we are observing that relaxed spacing and modestly-upsized completions can significantly improve well-level returns and, in many instances, recover the same amount of oil per drilling spacing unit than more dense well spacing. We are achieving increased productivity per well, similar section recoveries, and increased PV10 with substantially lower capital per drilling spacing unit. We're also seeing excellent results from our lone 2021 Anadarko development. the five-well Carroll Elder, which targets the Woodford Shale. Slide 11 in our deck illustrates the uplift we have seen with relaxed spacing and improved completions. Our Anadarko team has assembled a deep inventory of projects that are highly competitive for capital. I would also like to make a few comments regarding our ESG performance. Cotera, like both legacy companies before it, is deeply committed to making ESG performance a top priority. Our industry has grand engineering challenges, and we embrace these challenges wholeheartedly. Cotera is dedicated to be a top performer in ESG metrics, to be transparent in our communication, and to aim higher than state and federal requirements. We will be an industry leader in ESG performance. As we look ahead into 2022 and beyond, Cotera is well positioned to generate consistent returns. We have the flexibility to pivot in response to market constraints and opportunities, commodity price swings, and operational advances. Our capital allocation philosophy is supported by three pillars, geographic diversity, commodity diversity, and economic windage. Geographic diversity and commodity diversity are self-explanatory. Economic lindage is provided by having assets that provide some of the highest margins in our business. High margins and a low cost structure mean that returns are preserved through downdrafts and commodity prices. These pillars are a fundamental attribute and a competitive advantage of Cotera. Our capital discipline, diversity, and flexibility underwrite our ability to generate outsized returns and accelerate return of capital to our owners.

With that, I'll turn the call over to Scott. Thanks, Tom. As you mentioned, given the merger closed in the beginning of the fourth quarter, the reported third quarter financials for Cotera Energy only reflect the results of Legacy Cabot for this reporting period. However, my comments will include key items for Legacy Simrex also. I would specifically like to draw attention to the following financial and operational highlights for the third quarter. Legacy Cabot generated discretionary cash flow of $309 million in the quarter, including merger-related expenses, which was driven by a 69% increase in realized natural gas prices compared to the same quarter a year ago. Looking ahead, realized natural gas prices are anticipated to increase substantially in the fourth quarter of 21, driven by the expectation for the highest average quarterly NYMEX price we have experienced since the fourth quarter of 2008. The combined CAVEX and CIMREX free cash flow for the quarter totaled $387 million, which also included merger-related costs of $100 million. Legacy CAVEX production for the third quarter was 2.36 billion cubic feet per day, which was 2% above the high end of our guidance range for the quarter. Legacy CIMREX production for the quarter was 251,000 barrels of oil equivalent per day, including 81,500 barrels per day of oil production. Legacy Cabot incurred a total of 171 million of capital expenditures in the third quarter, while Legacy Simrex incurred 165 million of capital expenditures in the third quarter, excluding capitalized expenses. I would also note that moving forward, Cotera will be reporting under the successful efforts accounting method that Legacy Cabot utilized. which does not capitalize GNA and interest expenses. During the third quarter, Legacy Cabot repaid $100 million of senior notes that matured in September, reducing our principal long-term debt to $949 million. On a combined basis, Cotera exited the third quarter with a cash balance of $1.1 billion and principal long-term debt of $2.9 billion before adjustments for purchase accounting. Our strong balance sheet provides significant financial flexibility and allows for industry-leading capital returns through the cycles as evidenced by the special dividend we paid in October and the acceleration of our variable dividend that was announced in this morning's release. Now a few comments on guidance. Our fourth quarter 21 combined production and expense guidance assumes that we achieve results that meet our previously issued standalone annual guidance. Of note, we are reaffirming our fourth quarter oil guidance, which assumes 30% year-over-year growth as Tom highlighted earlier. Our full year 21 combined capital is expected to be at the high end of the ranges due to increased efficiencies and an acceleration of completions in late fourth quarter. Obviously, due to the timing of these actions, the increase in capital is expected to have no effect on 21 production volumes. but will benefit 22 volumes, taking advantage of the strong commodity price environment we find ourselves in. In the Permian, we are maintaining a second crew during fourth quarter 21 to complete a Lee County project versus our original annual guidance midpoint, which assumed we would drop to one crew in the fourth quarter. In Appalachian, we plan to drill an additional four wells and complete an additional seven wells during 2021. These completions are set to come online near year end. During the first quarter of 22, we plan to maintain two completion crews in the Permian and average just over one completion crew in the Marcellus. We plan to issue formal 22 guidance early next year. The combined financial strength and free cash flow generation potential of Cotera that was originally envisioned when contemplating this combination is illustrated in these results. and has been further supported by the tailwinds from the improving commodity price backdrop. With that, Matt, I will turn it over to you for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up.

At this time, we will pause momentarily to assemble our . Our first question will come from Neil Mehta with Goldman Sachs.

Please go ahead.

Congrats, team. On closing the transaction here and reporting your first quarter together as a company, Maybe just a high-level question to kick off, Tom, is just talk about how the integration is going, bringing together the two cultures and what you're seeing early on that gives you confidence in the combination and what you think is the biggest obstacle that you need to overcome in order to achieve your goals here.

Well, Neil, good morning. Thank you for that question. The integration is going very well. The single obstacle are moving trucks. You know, we're still kind of dispersed and flying around to meet with one another. But here, as we get into November, December, we'll all be off on one another, and that will certainly give us a head start. You know what? I am wholly optimistic, and I'm optimistic for several reasons. First and foremost, and you know my background, Neil, I fundamentally believe that the only competitive advantage a company has in the long run is its culture and the quality of its people, and I have been wholly impressed with the Cotera organization from top to bottom. We have people that are energized, really talented, willing to look at problems anew, and they bring an absolute commitment that's humbling to me in leading this organization. I've made two trips to the field in Pennsylvania and I have been nothing short of blown away by the quality of that operation and the dedication of our organization to work with the local community in providing this absolutely necessary resource in a way that is, I think, community friendly. Across our platform, we have people working together to develop new tools, to develop ways to make the best most disciplined capital allocation, and there's just great energy. It's really fun to be in the middle of this. And, um, you know, I, I just fastened your seatbelt and watch us perform.

Well, right. And the followup is just on gas fundamentals and how are you guys seeing the market here as we go through winter, but more structurally, um, as we think about 22 and 23 and in that context, What's your approach to hedging? I believe you guys are about 20% hedged here over the next couple of quarters, so you're still relatively open. But how do you plan on attacking the curve from here?

Hey, Neil. This is Matt Caron here. I'll address the fundamentals and then hand it over to Tom or Scott to discuss hedging philosophy. So currently, we obviously feel very bullish on the fundamentals that we've seen for gas hedging. Obviously, we've seen a pretty big uptick in the forward curve over the last couple months, which we think will certainly be beneficiary for Cotera going forward, given the lack of hedging in place right now for 2022. If you kind of look at the U.S. storage levels currently, we're about 10% below last year's levels and about 4% to 5% below the five-year averages. And more specifically, to where Legacy Cabot operates in the Marcellus, we see similar trends in both the Eastern and Midwest storage levels. So both for the broader 9X benchmark, but as well as local basis, we feel really strong about where we sit entering the winter months and certainly going into 2022.

Yeah, Neil, and in terms of hedging, again, like Tom talked about the integration, we're coming together. We have a formalized hedging policy. We have yet to kind of sit down at the table and collect our thoughts, but Tom, myself, And Jeff Hutton, our legacy marketing person, will be part of the hedge committee going forward. As you saw in the release this morning or in the investor deck, we did add some cabot hedges around the time of the transaction as we saw and followed the path of kind of wide collars. And I think that's still a great approach. But the positive of the market that's out in front of us that Matt talked about is we have the ability to be very offensive in terms of on our front foot around the hedge decision versus being in a defensive posture trying to protect things. The other dynamic I would add, and Tom and I had a conversation probably a month ago, is the fact that Cotera also changes that hedge decision from the perspective of its balance sheet and its overall financial wherewithal that there isn't as much when we were separate organizations that need to hedge as much, but we will still use it opportunistically. Thanks, Steve.

Our next question will come from Matt Portillo with TPH. Please go ahead.

Good morning, all. Hi, Matt. Just a quick question. Looking out into 2022, Balance sheet's in pristine shape, and obviously you've already initiated a fairly robust return to capital program for shareholders. Tom, just a higher level question. Philosophically, how do you think about buybacks in this environment as the debt load is in good shape? You've got the base in diversification and the equities trading at a pretty steep discount to probably long-term intrinsic fair value.

Well, that's a great question. You know, it's certainly in our toolkit is our buybacks. We're going to have tremendous flexibility financially as we look into 2022. You know, I'm stunned at how constructive one can be in terms of the amount of our capital that we need to invest to stay flat or, you know, generally flat. So we're going to have great flexibility with cash, even after our stated commitment of return to cash to our owners. We're going to model it. I'll just say there's going to be one word that will guide us into 2022, and that's discipline. And we're going to be disciplined in our capital. We're going to be disciplined in our capital allocation. And we're going to be disciplined in our use of funds. And we're going to look seriously at buybacks. You have to. But, you know, we're not going to do it because it's a fad. We'll do it because we think it's a prudent use of our capital. Scott, you want to comment on that?

I think you've covered it. And it's been an arrow in the quiver of the organization for a long period of time. And I think, as Tom said, it will be fully vetted. We're in the process of pulling that together. You mentioned the intrinsic value. We need to do that deep dive on intrinsic value. We also have to think strategically about it because historically when prices are good, your values are up, even if you're at a discount from your peers. When the prices move down, then all of a sudden you've bought shares at a higher price. All you've got to do is look at the average cost of the legacy balance sheet of Cabot as to what that intrinsic value is of the shares on the balance sheet. So it's also part of the economic decision. The rhetorical question, no answer required, is do you kind of leave that cash on the balance sheet and take advantage of that buyback in more lean times than where we find ourselves today. That will be all part of the discussion, Matt.

Perfect. And then maybe an asset level question for Tom and the team. Just curious, you're learning so far at Lone Rock with the new well results you've provided, how that may fit into kind of your development program in 2022 as it just relates to the returns you're seeing on that asset relative to the Delaware, and then just a medium-term question in terms of running room from an inventory perspective, particularly around Lone Rock, how you think about your inventory profile and the ability to develop that going forward.

Well, Matt, we're very pleased by the Carroll-Elder project. We look at our returns fully burdened, including all overhead, all associated costs, including legacy land. And we look at that, we model the Carol Elder as being highly competitive within our portfolio. Now you mentioned Lone Rock, but we've got a portfolio of opportunities within our Anadarko asset. There's kind of three major areas, Lone Rock being one, the up-dip kind of near the merge classically is another, and then we've got a really nice opportunity on our western fringe. All of those are highly competitive for capital You asked about inventory. Our team has done a nice job of presenting a really healthy inventory of two- and three-mile horizontal well opportunities. There'll be a slice of that in 2022. I don't, at this point, can't telegraph how big a slice, but I'll say it offers tremendous flexibility from a capital allocation standpoint to have that third basin that has competitive returns Because as you know, from time to time, there have been market constraints, both in Appalachia and in the Permian, and having that third highly profitable area is a tremendous safety valve that we offer our owners. So we're very high on the Anadarko. It obviously doesn't have the running room of our Pennsylvania or Delaware, but boy, it deserves a place in our portfolio.

Thank you. Our next question will come from Josh Silverstein with Wolf Research. Please go ahead.

Hey, thanks. Good morning, guys. I know you want to wait until January or February next year to provide a more formal guidance, really to see, I guess, how winter shapes up. But can you just talk about how much flexibility there is in the portfolio to shift capital around for 2022 relative to just the standalone baselines?

Well, Josh, thank you for that question. You know, we've talked about this in the past. When you're drilling these pad projects, you have long lead time. By the time you're into November, a lot of, certainly the first half of 22 is mostly baked in. So flexibility to reallocate capital will probably be a late second quarter, second half phenomenon. I would say the first half is probably mostly already underway in terms of what will be turned in line in 2022. Now that said, we're not shrinking from that challenge. We're going to be making, we don't have a lot of marketing commitments and we don't have a lot of vendor commitments. We have great flexibility to let capital flow to its most productive use. But that'll probably not actually involve equipment move on the ground until second half 22.

And just within that framework, does it even make sense to grow the more cells next year, even if we're at current strip pricing?

You know, make sense is something that I wouldn't want to put a stake in the ground on. If you'd asked me three months ago what made sense, a lot of things make sense today didn't make sense three months ago. You know, we're in a very strange time in that all of a sudden we realize, oh, my goodness, energy really is important. And you see prices moving up. You see a lot of concern about where energy markets will trend. And we have tremendous flexibility to adapt to that. So, you know, in terms of what will make sense in 2022, stay tuned. Got it.

And then just one more on the return of capital profile. Tom, one thing that you had wanted to do at Simmerx was build up enough cash for the 2024 maturities. You know, now that you're a combined company, that maturity is now growing to $1.3 billion. How do you guys want to build up cash for that, or how much of that would you want to take out with cash relative to refinancing when the time comes?

I'm going to let Scott handle that one.

Josh, I heard kind of pre-closing Tom's desire to pay off the $750,000. and I fully understand that. As you've known me a long time, I'm a debt-averse kind of guy, but I know that we have to have some debt in the capital structure. I would put that on a lower checklist, lower than stock buybacks, but I think continuing to repay debt is highlighted in the script. Cabot actually paid $188 million back this year, $88 earlier in the year, and $100 million in September. So I think you know, let us kind of get together and figure out and look out in these next couple years, but I would suspect a portion of that 1.3 will be paid back and a portion will be refinanced. I don't think, nobody's looking to go to zero debt in the organization, but maybe my gut, and Tom and I, in fairness, have not talked about this, but a target level of absolute debt around $2 billion versus $3 billion kind of feels like it's in the sweet spot.

So I would add to that, lots of things have changed in our business. Obviously, we're under regulatory pressures. We're under pressures coming from the SEC. We're waiting to see. We're under investor pressures. When I look at those challenges, I think you would find a company like Cotera probably moving forward to a lower debt level than we would have answered two years ago. Now, what that is, we'll see. But we used to say one and a half times debt to EBITDA. I think today we'd be significantly below that.

Thanks, guys.

Our next question will come from Michael Schiala with Stifel. Please go ahead.

Good morning, everybody. I'll ask, I guess, a couple operational questions. Tom, you mentioned slide nine. It seems a little perverse to me, I guess, that the industry is turning to wider spacing with oil prices above $80. But obviously it makes sense if you can get the same reserves with five wells per section that you can with seven prior. But have you looked at that greater completion intensity with seven wells per section? And I guess as you optimize that MPV per section, what oil price was that based on?

Well, that analysis will withstand any oil price. If you can recover the same reserves with less capital, that's not going to be a price-dependent analysis. Now, that said, you drill more wells, there will be an acceleration component. But our analysis tells us that that is not going to catch up to the destruction of investing more capital than you need to. So we think slide nine is a remarkable result. We're thrilled by it. and it frees up additional capital for more productive uses.

Okay.

And then slide 10, you mentioned you're turning toward the low end of the range on costs in Permian. How are you thinking about those costs as you look out into 22? And I guess, how much are you dependent upon or how much have you used SimulFrax at this point? Is that enough to offset the inflation that you've seen so far?

Yeah, this is Blake. I'll take that one. We're real excited to be training at the low end of the guidance, and that's really driven by operational efficiencies we've had throughout the whole value chain throughout the year. Drilling, completion, facilities, flow back, it's all a game of inches that's coming together. We do have inflation. We've seen inflation just like everybody else. We see it in steel. We see it in fuel. We see it in labor. We're working right now to try to model that for 22. That will come out with our 22 plan, but we expect continued operational efficiencies to help offset any future inflation. We have tried Zymofrac. We've done some of those projects. We're still trying to quantify the real savings to that. But, you know, right now we really like our zipper operations. We like our pad operations. We've seen tremendous efficiencies there.

Great. Thank you.

Our next question will come from Holly Stewart with Scotia Howard Wheel. Please go ahead.

Good morning, gentlemen.

Hi, Holly.

Just a follow-on to Neil's question, so for Tom or Scott, any items to highlight as you guys kind of sat down and rolled up your sleeves that maybe you didn't think about as you put these two companies together?

No, I think, Holly, at the end of the day, I think it was very well vetted going together. I think the interesting thing in the dynamic of putting the two together, not just the integration after the fact, but the like-mindedness of how the two companies have been managed in terms of just the conservative nature of the balance sheet, where we're at, the capital plans, the technical ability. As Tom complimented the Marcellus, we can do that same compliment of the Permian and the Anadarko staffs that we've met on our side. So there wasn't an aha moment. Obviously, it's a marriage. And for everybody on the phone that gets married, not every day is a – there are challenges each – can be each week, each day, or whatever, just from the different push-pull on various things. Blake and I have had the opportunity to serve on Steerco, and we've had a lot of great discussions and a lot of things come together to get us where we're at. And like Tom said, the biggest driver right now is we just need to all get together in one location so that we can move this forward. But there was no bright spot, aha moment that we said, oh, crap, we missed this.

You know, Holly, one of the things I've been most pleased about, first and foremost, is We're on track to achieve our announced G&A synergies, and I'm pleased about that. But once we got our operational teams together and really brainstormed on operational synergies, best practices, procurement, and how we might be able to leverage that, there are, you know, there's a set of ideas longer than my arm. And, you know, our tenancy is going to be under-promise and over-deliver. And I'm very optimistic. I also want to follow up in case my wife's on the line. I don't know what Scott's talking about.

Well played. Maybe my follow-up just on M&A, there appears to be a lot of assets hitting the tape, both on the oil and gas side of things. And certainly on the gas side, there's some things that might fit into the the legacy Cabot footprint? You know, without speaking, I guess, to specific assets, could you just comment on your appetite for M&A maybe and gas M&A along with that?

Well, as we've said all along, we're going to have the opportunity and flexibility to take advantage of really good opportunities. We've got our plate full right now with a deep inventory of fantastic projects and plenty of challenges. And it doesn't surprise me that lots of assets are hitting the market. You know, I think anybody who really believes what they say when they talk about discipline has to be really cautious buying assets at this uptake in prices. We've got great organic opportunities. We're developing additional organic opportunities. And so, you know, look, if something really made sense, we have the ability to strike. But yes, you used the word appetite. We're not hungry. We've got plenty to do.

Thank you, gentlemen.

Our next question will come from David Heikkinen with Pickering Energy Partners. Please go ahead.

Good morning, and thanks for taking my question. Really, first things first, Scott and Tom, your comment on counter-cyclical building of cash and then buying back stock at lows as opposed to high, if I could wash, rinse, repeat that for every conference call, that would be perfection. So thanks for that statement first. Second thing is, as you think about the gas markets, what's your maximum capacity or flow in the Marcellus going through the winter? Do you have a Do you have an assessment of where and how high that could actually go on a gross or net basis?

Well, this is Matt Caron, Dave. So, you know, we're set up to be able to move volumes, you know, even above the levels that we're at today if we think that the pricing warrants it. But, you know, as you know, we have the Lighting South project coming online, full in service on December 1st, but we've been starting to take certain portions of that capacity leading up to that full-end service. So that's going to provide us some incremental opportunities there. But from a gathering system perspective, we recently inked a new deal with Williams that's going to continue to expand on what we already have. So throughput's not really an issue. The question's going to be is the pricing and the returns on capital for the incremental volumes make sense for us up there, or will we just be long-term cannibalizing existing volumes that we already have in the market?

Okay. Yeah. price-dependent, but you've got ample upside to meet demand if it comes. And then on the Delaware Basin, Tom, I liked your slide about the five wells per section. As you looked around at other operators in your operations, how much capital was over-deployed in the basin? If you just think about seven wells versus five wells, is that the next round of operating efficiency as you head forward and kind of look at the basin and kind of ongoing developments across your portfolio.

David, on the operator, we didn't stumble onto this conclusion. It's the outcome of years of deep science, understanding our incremental well-level deliverability. A lot of work went into this. I'll just give you an example, and I don't want to get specific on geography, but we have a project going on right now that's slowing back. where we have drilled nine wells in the Upper Wolf Camp, and next door is an operator we really respect that's drilled 12. As we analyze those two projects, our volumes are right on top of theirs, because the geology is the same, the pressure is the same, the phase in the reservoir is the same, and we are recovering an equivalent amount of oil on our project compared to our neighbors. When we analyze our neighbors' project, we think it's a 100% rate of return. So if that's all you had were the wells you drilled and the volumes you flowed back, you would have a victory party and you'd celebrate a 100% rate of return. Our returns are significantly higher than that 100%. And if we didn't have the well level detail, we would have missed that. And I think a lot of operators that don't do the science will look at the sum total of project output and stop there with their analysis, and therein lies the missed opportunity.

Satisfaction without pressing further. That's a good summary of that operationally, too.

Thanks, guys. We drive ourselves crazy every day, and we'll continue to do so.

Thanks, y'all.

Our next question will come from Neil Dingman with Truist. Please go ahead.

Morning, Tom and all. Tom, just one after what's been said this morning. I'm just trying to get a sense of how you all think about now on a broader scale growth versus the shareholder return in general and maybe even more so in times like today in order to take advantage of these higher prices.

Well, it's all about shareholder return. So we think first and foremost, beginning and end, about shareholder return. Now, you know, we will see. I think we're at a bit of a pivot point with what's happening with energy markets. I think there's been a societal realization that, oh my goodness, maybe fossil fuels are important after all. Certainly oil markets have moved up, gas markets have moved up. If we have any kind of a winner, there's going to be a serious call on natural gas in the United States. And we don't live in a vacuum. Although today, I think, you know, we are absolutely committed to everything we've said that we think growth is probably not called for. But, you know, we wake up every day and we're flexible. So, you know, what we don't want to do is get back to this cycle where capital is destroyed by the industry putting the pedal to the floor when times are high and then suffering when times are low. We're going to be disciplined. We're going to move prudently. But, you know, we don't live in a vacuum. We will adapt to the world we live in. And there'll be, you know, shareholder pressure that will also adapt to that changing world. So we have, you know, Cotera has great opportunity to be flexible through this changing energy landscape.

Great. Well said. And then just a follow-up. Now that everything has closed, where do you all sit just on sort of block and tackling on M&A? Are there some pieces that you can let go? Are there some other things that you'd like to bolt on to sort of tie in? I'm just wondering any thoughts you all can share with that.

Well, we always would like to let go stray properties. We still have some things that probably are better off in other people's hands, not, not big chunks of our portfolio, but you know, every now and then somebody pitches, Hey, we've got this set of wells. It's just not very efficient for us to operate. And we'll continue to look for those opportunities. And then, you know, we remain interested in bolt-ons, but I'll just say what I said to an earlier question. We're going to be highly disciplined. You know, we're not empire building here. We're value creating, and that will be our goal.

Well said. Thank you all.

Our next question will come from David Dekelbaum with Cowan. Please go ahead.

Morning, Tom, Scott, and Matt. Thanks for taking my question today.

Hi, David.

I really just had one question. I'm curious, especially, Tom, you brought up the Anadarko, and I know we're going to be getting into capital allocations in early 2022 for next year. Would there be any interest on Cotera's part now at considering third-party capital or other developmental structures, using someone else's wallet to develop some of the resources that you might have a difficult time allocating capital to? Or does it really just make sense just given the leverage profile now and the returns to sort of look at doing everything organically?

No, you know, David, we're very open to those types of opportunities. We've explored a couple of them. And, you know, it kind of depends. You mentioned Andarco. But, you know, I think we'd be open to opportunities like that in some of the areas of Permian as well. We haven't. pull the trigger on anything like that. But I'll say we have a very active team that's putting some options in front of us. So I don't know whether we'll do it or not. But your question is, would we be open to it? And the answer is absolutely.

At the end of the day, I guess, if you were to pursue something like that, would you be looking, you know, what would you be looking to accomplish above all else? Is there Are there areas like the Anadarko that are just not optimized from a capital perspective, or would this have to be an opportunity that really just sort of augments in your term free cash per share?

Well, I would put this in the embarrassment of riches category, where when we look at our inventory, we have some things that are years down the road in our inventory, but there are others for whom they would jump at the opportunity to confidently invest at those returns. And so when we look at that, we say, you know, if something isn't going to get drilled for the next eight or ten years, and yet it has a return profile that would be highly enticing to an outside party, you know, we look at the opportunity to accelerate that value. And that's kind of how we think of it.

Fair enough. Thanks for the replies, guys. Best of luck with the continuation.

Our next question will come from Doug Legate with Bank of America. Please go ahead.

Thanks. Good morning, everybody. Guys, I wonder if I could – I hate to ask a certain question, but I wonder if I could play back to you a little bit of the rationale for the conversion. Less volatility, stronger balance sheet. recognition of a variable dividend is a bit of a subjective call, I guess. What about the base dividend? If you've got lower volatility on a better balance sheet, why not step up the base dividend?

Doug, it's Scott Schroeder. How are you?

Good to hear from you, Scott.

In terms of the base dividend, let's kind of reset the platform here. Legacy Cabot had a base dividend increase in the spring of And then on announcement in May, there was a second dividend increase going from the 11 cents to the 12.5 cents that was memorialized right now in this first COTERRA dividend that was announced. We're firm believers in a plan to rationally grow the base dividend over time, but having just done two and knowing that we're in a very robust commodity price environment, Let's kind of see how this shakes out because we do, as you pointed out, have the ability to continue to return with the variable dividend structure that we put in place. And let me add on that, remember the legacy Cabot one was once a year that Cotera, because of the financial wherewithal, is going to do that assessment every single quarter, which gets dividends back in the hands of shareholders quicker. And so, again, we're all in favor of growing the base dividend, but in a methodical way. You'll remember I said in my history, I'm all for it, but I never want to get too far over our skis where we would ever have to ratchet it back. And this legal enterprise in 31 years of paying a dividend has never had to call that audible or even reduce it, and we want to continue to build from that point.

It's a fair debate. I think the issue is about recognition. Hey, Doug, you're cutting out a bunch. I mean, we're hearing about every other word. I'm sorry. I'm sorry.

Doug, you're going to have to just follow up with us because we can't hear you.

Our next question will come from Leo Mariani with KeyBank. Please go ahead.

Hey, guys. Just wanted to follow up a little bit on a few of your comments here. Certainly, I guess you guys have pledged to return 50% of basically cash flow to shareholders here and Just want to get a sense if we continue to see just a very robust commodity tape as we roll into 22, sounds like that number could be, you know, a fair bit, you know, higher than that. You guys did talk about discipline. So it sounds like, you know, you're not planning on, you know, all that much growth for 22. So commodities are high. Given the fact that balance sheet's really strong, just sounds like we could be expecting, you know, certainly some increases in the returns here. Is that generally how I'm hearing here?

Yeah, Leo, that would be correct, just based on the simple math of what the scenario you laid out.

Yeah, Leo, I would say our action this morning to advance our variable dividend accord is telegraphing that that's our bias. Our bias is to lean forward. Now, we want to be careful what we commit to, but I think as we get quarter by quarter, you're going to see how we behave, and that bias will be clear.

Okay, that's helpful. And I just wanted to touch base on a couple number questions here. So certainly noticed that the Cabot standalone LOE was up a little bit in third quarter. So just wanted to get, you know, any kind of color around that, if that was more, you know, maybe one time, you know, in nature. And then just from a, you know, high level perspective, I know you guys did provide some guidance on deferred taxes here in the fourth quarter, which is helpful. But Would you guys continue to expect a decent-sized cash tax shield in 22, kind of like you're seeing in 4Q? Just trying to get a sense of the tax shield from the combined entity.

Hey, Leo. This is Matt Caron. On the LOE for Legacy Cabot, those numbers can move around a little bit quarter to quarter, depending on some of the workover projects we have. So we did have an increase in workover in Q3 that kind of caused it to come a little bit above the high end of the range, but somewhere in that $0.08 to $0.10 range on a legacy cabinet basis is where we would expect that number to be on a go-forward basis. As it relates to deferred taxes, I'm going to hand it over to Dan Guppy, who's the whiz when it comes to that.

Sure. Thanks, Matt. So we gave guidance for 30% to 40% on a deferred tax basis, and we communicated in terms of 382 annotations and built-in gains We would expect the $1.3 billion of NOLs that were on CIMRx's balance sheet at 930 to be a shield that is radically spread over the next four to five quarters. As we've discussed in prior calls, we would expect that NOLs to be fully utilized during 2022 based on current strict prices. As we walk into 2022, you can expect the deferred portion to be in that 30% to 40% range, again, depending heavily on commodity prices and investment levels, but we do expect full utilization of the NOLs by year-end 2022.

Okay, that's very helpful. Thanks, guys. Again, if you have a question, please press star then 1.

Our next question will come from Noel Parks with 2E Brothers. Please go ahead.

Good morning. Good morning.

I just had a couple things I wanted to check in on. You know, you had some discussion of cost inflation and it sounds like you anticipate being able to use operational efficiencies to offset some of that going forward. I just wonder, does that play into your thinking at all around whether strategically you know, Cotera or the industry broader, is going to need to inch back towards thinking more about scale. You know, the focus has been so much on efficiency, maintenance, maintenance drilling. But if there is steady cost inflation, at some point it seems that the thinking does start to head more over towards perhaps operations over a narrower set of basins or just other things that lead you to sort of maximize the potential for scale?

Well, we've talked about scale a lot over the years, and I'm going to repeat what I've said in past calls. The first big ticker on scale are long laterals. If you can get two or three multilaterals, there's tremendous cost savings there. So aggregating your land to be able to do that is critically important. And then an aggregation so you can most efficiently deploy your infrastructure dollars, both gas gathering and compression, saltwater disposal and oil gathering is also important. You know, I think beyond that, certainly procurement is an important scale topic, but You know, quite frankly, I think scale can be overblown. I think once you've checked those boxes and you have a really great operational team, that you're down to very small differences between, you know, certainly huge companies and scrappy little companies. You know, scale alone were the answer. I think the majors would have the lowest cost structure in our business, and clearly that's not the case. And so, you know, I think scale is important, but it's important to a point. In each of our three basins, we have the opportunity to have the lowest cost structure, and that's our challenge. We don't use scale as an excuse. We think we've got what we need to deliver lowest cost. Now, I want to say one other thing. Our vendors are our partners, and they need to make a significant living as well. They need to show up with well-maintained equipment, a commitment to safety, and well-trained crews. And so we understand, you know, some of this inflation is an inevitable outcome of good partnerships. And so, you know, of course, we're going to complain like crazy, but we're also going to be supportive of our vendors.

Fair enough. Thanks. And I guess one other thing I wanted to check in on is you have stressed the the many fronts on which the combined companies enjoy tremendous flexibility, especially in this commodity price environment. And as you look ahead and think about product mix that you might pursue across the various basins, can you talk a little bit about how ESG or policy risk might weigh into your thoughts about oil versus gas, including what's going to happen with federal lease permits and so on?

Well, you know, we certainly are widely aware of the challenges, and it's not just federal, it's state, it's investor pressure, it's everywhere we look. We're committed to be a top-tier operator in ESG, as I said in my opening remarks. That doesn't necessarily fall into a commodity preference. We think we can deliver the cleanest barrel of oil and the cleanest MCF of gas, and we think the U.S. producer is desperately needed to do both. Cotera will be at the front of the line on that. I don't think it will have any kind of thumb on the scale on capital allocation decisions, nor necessarily will commodity mix. The beauty of Cotera is capital is going to flow to its highest, most productive return. And that's what we're going to do, and we're going to be disciplined in doing that.

Great. Thanks a lot. This concludes our question and answer session.

I would like to turn the conference back over to Tom Jordan, CEO and President, for any closing remarks.

Well, thank you for joining us on this first Cotera conference call. We look forward to reporting results over many more quarters, delivering what we promised, and reporting our progress. But I want to thank you for a series of great questions, and we're going to get back at it. So thank you.

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