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spk01: Ladies and gentlemen, thank you for standing by. My name is Sherelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cotera Energy 3Q23 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press one, I'm sorry, simply press star. Follow by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Dan Guffey, Vice President of Finance Planning and Investor Relations. Please go ahead.
spk03: Thank you, Operator.
spk19: Good morning, and thank you for joining Cotera Energy's third quarter 2023 earnings conference call. Today's prepared remarks will include an overview from Tom Jordan, Chairman, CEO, and President, Shane Young, Executive Vice President and CFO, and Blake Sergo, Senior Vice President of Operations. Following our prepared remarks, we will take your questions during our Q&A session. 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 prepared in our earnings release and updated investor presentation, both of which can be found on our website. With that, I'll turn the call over to Tom.
spk17: Thank you, Dan, and thank you all for joining us this morning. Cotera had an excellent third quarter, exceeding expectations across the board. This was the result of several factors. including outstanding performance from our top tier assets and excellent operational performance from our organization. I want to particularly acknowledge our field employees and vendors who are the driving force behind our outstanding results. Although we are pleased to announce these results, quite frankly, it's what you should expect of Cotera and what we expect of ourselves. We are not interested in being average. These results are best understood within the framework of the core thesis of Cotera. With top tier oil and natural gas assets, Cotera can flexibly allocate capital to take advantage of changing commodity prices, changing technical innovations, and changing field conditions. We work for our shareholders, and we believe that they are best served by a disciplined approach that generates consistent, profitable growth. We do not manage the company around production targets. We manage the company to maximize the financial productivity of our assets. We seek to grow our per share profitability throughout the cycles, which is best achieved through a combination of prudent investments and direct shareholder returns in the form of dividends and buybacks. We are problem solvers. Albert Einstein said, It's not that I'm so smart. It's just that I stay with problems longer. At Cotera, we stay with problems longer. Staying with problems longer means that we do not simply adopt workable solutions. We demand perseverance in finding optimum solutions. This is true with our technical challenges as well as our financial challenges. We do not adopt an a priori zero growth posture in operational planning. No more or no less than we assume a priori answers to technical problems before engaging in rigorous analysis. A key focus of our organization is iterative operational and financial planning. We engage in exhaustive planning iterations in an ongoing effort to maximize our capital efficiency. focusing both on asset productivity and cost optimization, which also allows us to analyze and model multiple options. Dwight Eisenhower said that, in preparing for battle, I have always found that plans are useless, but planning is indispensable. At Cotera, we build annual capital plans that have on-ramps and off-ramps. By limiting our long-term commitments, we retain the option to pivot capital from one area to another as conditions warrant. Our history tells us that flexibility is crucial, or we cannot predict the future. It is not the plans that are important. It is the planning. This planning process combined with the high energy, innovative, and curious organization is the core of Cotera's strength. We do not intend to provide detail in our 2024 plans during this call. However, we are highly confident that our results will continue to be top tier, that our capital efficiency will continue to improve, and that the quality and duration of our inventory will continue to be apparent. As we have previously discussed, we expect to enter the year holding our Marcellus gas production relatively flat as we monitor gas macro conditions. By doing so, we can reduce Marcellus capital by at least $200 million versus 2023, while maintaining the optionality to pivot back to the Marcellus when gas markets structurally rebound. In February, we will provide an updated three-year outlook. We do not expect significant deviations from our current strategy of allocating capital to its most productive use to achieve moderate discipline growth. Under a moderate multiyear growth strategy, our corporate breakeven defined as the ability to generate excess free cash flow after paying our healthy common dividend will remain below $50 oil and $2.50 natural gas. Before I turn the call over to Shane, I want to close with our answer to the question, why Cotera? Cotera is a new company and one that is unique in our space. We have top-tier assets, a top-performing organization, and robust revenue diversity. We operate among a field of great competitors, and we are here to compete. Cotera is designed to provide excellent financial and operational results through the cycles. Our goal is to make top-tier results routine. As I said, it is what you should expect of us because it's what we expect of ourselves. With that, I will turn the call over to Shane.
spk07: Thank you, Tom, and thank you, everyone, for joining us on our call today. This morning, I will focus on three areas. First, I will discuss highlights from our third quarter 2023 results. Then, I'll provide production and capital guidance for the fourth quarter and update our full year 2023 guidance. Finally, I'll review where we are on our shareholder return program year to date. Third quarter total production averaged 670 MBOE per day. Oil averaged 91.9 MBO per day. And natural gas averaged just over 2.9 BCF per day. All production streams came in above the high end of our guidance, driven by a combination of continued positive well productivity, coupled with faster cycle times that accelerated tills. Current end lines during the quarter totaled 46 net wells, 25 in the Permian at the high end of guidance, 14 in the Marcellus at the midpoint of guidance, and seven in the Anadarko, as our Evans project came on a few weeks earlier than expected. Turning to our financial performance. During the third quarter, Cotera reported adjusted net income of $373 million or 50 cents per share and discretionary cash flow of $796 million. Approximately 64% of our revenues for the quarter were generated by oil and NGL sales. Accrued capital expenditures in the third quarter totaled $542 million at the low end of our 540 to $610 million guidance. And free cash flow was $250 million after capital expenditures of $546 million. Total cash costs during the quarter, including LOE, workover, transportation, production taxes, and G&A, totaled $7.99 per BOE, down for approximately $8.27 in the second quarter. This was below the midpoint of our annual guidance range of $7.30 to $9.40 per BOE. One note on our deferred tax guidance. Beginning in 2022 and with greater impact in 2023, new requirements under the Tax Reform Act of 2017 require Cotera to capitalize Section 174 R&D expenditures and amortize these expenditures over a five-year period rather than expensing them in the year in which they occurred. Our third quarter 2023 deferred income tax ratio was negatively impacted by this new requirement. As such, we now expect 95% or more of our full year 2023 income tax expense to be paid during the current year. This 5% to 10% change in our percent deferred will have a minor impact on 2023 discretionary cash flow, but we felt it was worth clarifying on this call. Looking ahead, we estimate over the next few years, our percentage of income taxes to be current will be greater than 90%. Looking ahead to the fourth quarter of 2023, we expect total production to average between 645 and 680 MBOE per day. oil to be between 98 and 102 mbo per day and natural gas to be between 2.78 and 2.9 bcf per day we expect crude capital in the fourth quarter to be between 460 and 530 million dollars which includes the impact of infrastructure and non-operated activity shifting into the fourth quarter for the full year 2023 Today, we are increasing our production guidance. Our oil volumes are now expected to come in at 94.5 to 95.5 MBO per day, up 3% from our August guide. Our BOE and natural gas volumes are now expected to be 655 to 665 MBOE per day and 2.84 and 2.87 BCF per day, up 3 and 1%. 1% respectively from our August guide. Relative to our initial February guidance, Cotera's full year 2023 production guide has increased 5% for BOEs, 7% for oil, and 3% for natural gas. The incremental volumes were driven by an even split between better-than-anticipated well productivity and faster cycle times in the field. Based on updated guidance and recent SRIP pricing, we now expect to generate full-year discretionary cash flow of approximately $3.5 billion, with more than 50% of revenue driven by oil and NGL sales. The company expects to invest approximately $2.1 billion, or roughly 60% of cash flow, and generate free cash flow totaling $1.3 billion. On to shareholder returns. Last night, we announced a $0.20 per share base dividend for the third quarter. Our annual base dividend of $0.80 per share remains one of the highest yielding base dividends in the industry at nearly 3%. Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence. During the third quarter, despite Relatively lower commodity prices and cash flow, Cotera continued to execute its return program by repurchasing 2.2 million shares for $60 million at an average price of approximately $27 per share. In total, we returned 84% of free cash flow during the quarter. Year-to-date, including our base dividend and $385 million of share repurchase we have returned $839 million, or 91% of free cash flow to our shareholders. Taking into account recent script pricing, buyback activity completed year to date, and our expected base dividend for the year, we expect to return greater than 80% of our 2023 free cash flow to shareholders, well in excess of our 50% plus minimum commitment. Moreover, Since instituting the buyback program in 2022, Cotera has repurchased a total of 64 million shares, or 7% of our shares outstanding, for $1.6 billion at an average price of $25.72 per share. In summary, Cotera's team delivered another quarter of high-quality results, both operationally and financially. We look forward to a strong final quarter of 2023, which we believe should set a solid foundation for 2024 and beyond. With that, I will hand the call over to Blake to provide more color and detail on our operations. Blake?
spk21: Thanks, Shane. This morning I will discuss our capital expenditures and provide an operational update. Third quarter accrued capital expenditures totaled $542 million. coming in at the low end of our guidance of $540 to $610 billion, primarily due to delayed infrastructure spend and lower non-operated activity, both of which we expect will move into the fourth quarter. As such, we are reiterating our full year 2023 capital of $2 to $2.2 billion and continue to trend 1 to 2 percent above the midpoint. Looking ahead to 2024, we continue to expect a 5% dollar per foot decrease based on leading edge service costs and contract repricing. Of note, we continue to see meaningful price decreases in OCTG, rig rates, and frac spreads. However, other cost categories, including labor and fuel costs, remain resiliently high As noted in our investor deck, in the third quarter, our Permian and Marcellus rat crews averaged 17 hours per day, up 18% from a year ago, and an all-time record for our pumping efficiency. The drivers of this improvement include larger project sizes, increased wells per pad, improved water sourcing, and a focus on transition timing. Over the last few years, our company has achieved improved capital efficiency. through the execution of longer laterals, combing of surface facilities, and CYMOPS. Our operations teams in all three basins continue to find creative and impactful ways to improve our capital efficiency. These gains couldn't be achieved without the strong execution of our world-class field staff. We recently added a seventh rig in the Permian Basin a few months ahead of schedule. This was driven by a recent decision to simulfrac and de-risk the timing of our largest 2024 project, the Wyndham Row in Culberson County. Simulfracking has the potential to decrease dollar per foot on this project by an incremental 5%, bringing the project's total estimated cost savings to 5% to 15% versus our current Culberson County average. To our knowledge, This project will be the first all-electric simulfrac powered directly from the grid. Currently, we are running 10 rigs, seven in the Permian, two in the Marcellus, one in the Anadarko, and three frac crews, two in the Permian and one in the Marcellus. When looking ahead to 2024, Cotera has fewer than 25% of its rigs and frac fleets under contract. This provides significant optionality. We are in the middle of negotiations on a number of contracts and will provide a detailed update in February.
spk17: Thank you, Shane and Blake. Momentum at Cotera continues to build. We're generating consistent, profitable growth. The company remains well-positioned to deliver on its stated goals. We appreciate your interest in Cotera and look forward to further discussing our results during question and answer.
spk01: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Please bear in mind that one question and one follow-up is allowed for this Q&A session. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Nitin Kumar. Nitin, your line is open.
spk14: Hey, good morning, Tom and team. Congratulations on a great quarter. Tom, I want to start with cash returns. As much as your oil performance has been impressive, as Shane mentioned, you're on track to return 80% of free cash flow this year. Some of your peers have increased the commitment or the percentage that they promised to give back. You're still at 50%. Just You know, if you could share some thoughts on how you're thinking about the cash return framework and could we see it evolve in 2024?
spk17: Well, I'm going to let Shane carry this one over the finish line. But look, I'm just going to say flat out, we're not interested in getting in an arms race of promises on cash return. I think you can look at what we've done. It's nicely laid out in our deck that we have a history of being serious about returning cash to our shareholders. But as you know, Nitin, we really value flexibility, and I just don't think it makes any sense to make, quite frankly, glorified promises. We'd rather be measured by our results.
spk07: Yeah. Thanks, Tom. I think Tom laid it out really, really well, Nitin. But I would just emphasize that for the third quarter, we returned 84% of our free cash flow. For the year to date, we're well above that, over 90% of our free cash flow. And that 80% figure that I talked about earlier, you know, that's a number that sort of takes into account buybacks to date plus dividends, including an assumed hold of the dividend in the fourth quarter and doesn't assume any incremental repurchases. So that number could well go up higher by the time we get to the year end. If you look at the track record and the history, if you go back to the first quarter of 2022 to date, You'll see we've been anywhere from 70% to in excess of 100% of our shareholder returns as a percentage of free cash flow, really averaging a bit over 80% over that time window. So I go back to what Tom says. Look at what we do and judge us by those actions, but we are fully committed to returning capital in a good quantum to our shareholders.
spk14: Great. Thanks for the fulsome answer, guys. As my follow-up, obviously, industry consolidation is on everybody's minds recently. You know, Tom, you were very systematic and disciplined at Simerex when you were creating your permanent position. Then with the combination with Cabot and the formation of Cotera, you took a slightly different approach to building a different company. So just, you know, if you could give us your thoughts on the M&A market where you see Cotera fitting in and what is your strategy around consolidation from here on out?
spk17: Well, then, thank you for that question. Our strategy is simple. It's consistent, profitable growth. We want to generate financial returns through the cycles. We don't want to be beholden to a particular commodity nor a particular geography. We believe in operational excellence and think that being good at the business is a strong underpinning of any kind of financial runway. We don't have a problem to solve. I think the combination of Simrex and Cabot built one of the most resilient companies in our space, and hopefully we are in the process of proving that. to our viewers. But as we look at the landscape, we would view M&A solely as an opportunity but not a necessity. We don't have a strategic goal around any kind of M&A. Quite frankly, we're cautious. We're cautious because when you invest through the drill bit, you can do that incrementally and you can pivot and adjust as conditions change. M&A involves large episodic movements that can often catch you counter cyclically. So, you know, we're opportunistic. We're never going to say never to anything. We look at it all. But, you know, we're going to be disciplined. Shane, you have any thoughts on that?
spk07: No, look, I would just echo that, you know, look, the last month has seen some large-scale M&A, but really 2023 has been an active year for M&A throughout, you know, of all different shapes and sizes. And we're always curious. And if things are out there, we're always trying to figure out if there's an opportunity for those things to help make us better over time. But clearly, year-to-date, we haven't seen anything that sort of checked all the right boxes. And so, We're very comfortable with taking the business from where we sit today.
spk17: Yeah, you know, Shane said it right. It's about getting better. And, you know, I'm particularly proud of the way this organization is performing and, you know, very confident in saying we intend to make it routine. We would not put that at risk with something that interrupts our momentum, period.
spk04: Great. Thanks for the answers, guys.
spk01: Your next question comes from the line of Humane with Goldman Sachs. Humane, your line is open.
spk13: Hi, good morning, and thank you for taking my questions. My first question was on the Windham Road development. Can you provide any details on the expectation from the program and any color you can provide on the RIGAD and your plans to do this project heading into 2024?
spk21: Yeah, Mon, this is Blake. I'm happy to take that one. You know, as we've talked about, the Wyndham row is really our largest row project to date. It's just taking all of our operational efficiencies and putting them in one place. So it's several DSUs lined up together. It's not what you would consider one giant cube development. We're prosecuting the upper Wolf camp across one big section and by one big row. And by doing that, we can concentrate our rigs. our frack crews, we can commingle our facilities, and we can drop our infrastructure costs. So all that adds up to some pretty big cost gains. The decision to add the rig a little bit early was frankly just to get ahead of getting the wells ready. We've decided to simulfrac that row, and so simulfrac moves very quickly. You got to have all the wells ready, and we just wanted to make sure we had plenty of buffer there. So that's really the main driver.
spk17: It's also an electric simulfrac, and that requires additional lead time for our partner.
spk02: I see. That's really helpful, Kala. Thank you.
spk13: I guess moving to your three-year outlook, and we will wait for a fulsome update next year, but I wanted to get your high-level thoughts. I mean, this year you have shown strong performance. Oil growth is 9% year over year, or close to 9% year over year. And then on slide number 14, you highlighted continued expectation for strong productivity in the Delaware going forward. How should we think about the evolution for the company over the next three, four years? Any high-level thoughts you can provide there?
spk17: Well, I think you should think of it in terms of our history of behavior. You know, we don't manage a company by production goals. I think I was clear in my opening remarks on that. We really seek to fund very robust projects that not only deliver outstanding returns, but have remarkable windage if the commodity price were to fall so that we know that we're getting a good return on our capital through the cycles as we can best predict them. So, you know, we decide how much production capital we want to invest, what projects we want to fund. We do our very best job to come up with an estimate of what the production will be. And then we challenge our organization to overshoot that. And when they do, we don't view that as a negative. And so that's the way we're going to view our three-year plan. And we really hope to be providing better and better guidance. We always like to get what we aim for. high or low. We want to hit what we aim for. And although we're proud of outperformance, it means we need to go back to the drawing board and do better estimation.
spk02: That's a great answer. Thank you.
spk01: Your next question comes from the line of Arun Jayanaram with JP Morgan. Your line is open.
spk09: Yeah, good morning. I was wondering if you could really appreciate slide 17 on the Wyndham row, but I was wondering if you could get a sense of what you're doing to de-risk some of the project timing and development of that large row development. In particular, I was wondering to see if you could give us some insights on some of the learning from the Mint Julep project that you did this year, which maybe helps to de-risk this larger project.
spk21: Yeah, everyone, this is Blake. I'm happy to take that one. You know, we've learned as we've expanded these rows bigger and bigger, and while it's a big, pretty slide and a long row, you need to remember this is kind of what we do day in, day out. We drill DSUs all over the Permian, and we have to stay ahead of them no matter where they are. This is just putting them all in one big row so we can prosecute them as one project. There are lots of things we've learned along the way. Simops is probably the biggest one by far. We build in a lot of timing estimates based on when we drill, and then we frack, and then we drill out our plugs. There's a lot of timing scenarios we use, including what happens if something gets stuck, what happens if something goes wrong. We call them bailout wells. We have another well ready to go that we can shift the operation to while we work on that well. And that's really how we approach it. We build a lot of flexibility into the row development.
spk09: And Blake, just as a quick follow-up, how many wells would you expect if timing goes as planned to come online next year? Because I think you just started drilling the row in the third quarter. All of them.
spk21: It'll be the full row will come online next year, which is 51 wells. Yeah, sorry. And it won't be one big slug. As we get further down the road, those first wells will start coming up.
spk09: Okay. And then my second question, Tom, where do you stand in terms of the $200 million of capital that could be reallocated from the Marcellus to your other two assets and maybe just a quick update on how DMICC Township, you know, how that could impact or influence that decision?
spk17: Well, I'll take that in reverse order. You know, we don't see DMICC being a material influencer one way or another. We're very pleased to be returning there, but it's not really a critical factor in any of our remarks. And then as far as the $200 million around, we're still where we've been. We have flexibility there. We're analyzing our options. You know, we've got every option in front of us and look really forward to discussing 24 when we're ready to discuss it. I mean, you know, we're still working on our plans.
spk03: Great. Thanks a lot, Tom.
spk01: Your next question comes from the line of Doug McGate with Bank of America. Doug, your line is open.
spk15: Thank you. Good morning, everyone. Thanks for having me on. Guys, I wonder if I could ask about the anecdotal, where it sits in your thoughts on relative capital allocation for 2024. And I guess my question is around the guidance suggested no tills in 3Q. And yet we obviously saw the activity there. So I'm just curious if your thoughts on the competitiveness of the Anadarko has stepped up a bit going into next year.
spk17: Well, thank you for that question, Doug. As you know, we love the Anadarko. It competes heads up. It offers market flexibility. It also is... really coming back to force with some new targets, some new completion styles. You know, the fact that we turned some wells and lined in the third quarter is just an outperformance of our execution. But I think you could expect a healthy Anadarko program next year. And it's not out of love or affection. It's out of competing for capital. And those projects are really competing for capital. and then the one other thing they've done is they've established repeatability now we've got a few behind us that have been repeatable executed well gone like clockwork and that's what we're looking for i guess my follow-on is kind of related tom thanks for that answer but so but if i think about
spk15: you know, the indications on where costs are headed, capital costs are headed and all the moving parts in there, not just from yourselves, but from your peers. And then I also stick with the, you know, the mantra that your capital program is really, you know, driven by efficiency and not by growth. I look to 2024 and I have to consider whether your CapEx guidance either is low end of your current range or maybe has some downside risk And I'm trying to understand, would you rather take those efficiencies and redeploy the capital and keep the capital the same, or are you trending lower in your spending going into 2024? Any early guidance would be appreciated.
spk17: Yeah, I'm going to give you very vague guidance here. You know, we'll take efficiencies every day we can find them. And to the extent that efficiencies mean we can do the same thing next year cheaper than we did this year, all else being equal, that's a wonderful outcome. And we seek to find those outcomes everywhere we look. But you can infer what you will with that $200 million, what that means. But it means we have more opportunities than we thought we'd ever have because of efficiencies. We're not prepared to say whether we'll be flat, up, down, sideways. But I will say this. I think you can look for us to have a very strong 2024. based on the operational momentum, capital efficiency, asset productivity, and operational execution that we have going on. It's going to flow right into 24, and we will be able to do more with less.
spk04: Appreciate the answer. Thanks so much.
spk01: Your next question comes from the line of Scott Greber with Citigroup. Scott, your line is open.
spk04: Yes, thank you and good morning.
spk16: Good morning. I want to touch on the strategy with the road development. It does differ a bit from peers in that you're generally focused on single zone development and not developing multiple benches. Can you just provide some more detail on what differs from a geologic perspective on the eastern side of your acreage? You mentioned on the eastern side co-development isn't necessary. Do you just see far less communication on the eastern side? Or is the strategy mainly a call on really being able to leverage prior surface spending when you do develop those Tier 2 zones down the road to offset the lower productivity? Just some more color on the strategy.
spk17: Yeah. Well, I'm going to just say, first and foremost, as much as we talk about the Permian Basin, it's highly variable. And a lot of things change, depth, pressure, product type. It's really not one single basin, but you have tremendous variation in stratigraphy and geomechanics and how rocks respond. For much, not all, but for much of our assets, we have come to the informed conclusion that co-development of vertical benches is not necessary. We can develop a particular bench and come back and develop benches above and below. Now, that's a function of frack barriers. It's a function of reservoir performance. It's a function of timing. But, you know, the fact that others see it differently, they're playing in different areas of the basin. It's like me telling you that Mexico has the wrong word for beer. You know, I mean, you get different answers depending on where you are. Even within the Wyndham Row, you're going to see that the interference changes from east to west. So, you know, we're very confident in our approach. I'll just leave you with that. That's not to disagree or contradict anybody else's, but we have a lot of data that makes us firm in the statement that we can develop this single bench in the Wolf Camp without leaving behind resource above or below us. It's also highly efficient for our infrastructure. But that's a benefit, not a driver.
spk21: Yeah, I'll just add to that. The road development does lay the groundwork for all future benches that we might develop. The infrastructure is in place. The tank batteries are in place. Our team has already modeled all those zones and how they can come on later. And it'll just drive down the dollar per foot on future projects. But as Tom said, that's an outcome. That's not the driver of why we're developing
spk16: Yeah. Do you have like a rough estimate in terms of savings on the subsequent developments when all the infrastructure and surface spend has already sunk?
spk21: No, I'd be nervous to quote a percentage on that one because it's not in the immediate drill schedule, but it's significant. It'll move the needle.
spk04: Okay. I appreciate it. Thank you.
spk03: Thank you.
spk01: Your next question comes from the line of David Deckebaum with TD Cohen. David, your line is open.
spk00: Thanks, Tom and team. I appreciate you guys taking my questions this morning. Morning, David. I was curious, you all have, you know, demonstrated some pretty impressive, well, productivity gains, certainly over your base cases. I'm curious, as we progress into the back half or the end of 23 into 24, 25, How would you contextualize midstream constraints? I know, obviously, you have large-scale developments like Windembro coming online, but we've heard by and large from many of the peers in the area that midstream is creating a pretty big overhang around some near-term productivity. Could you contextualize, I guess, what you're seeing and how you feel about the midstream setup going into 2024 and 2025 relative to your productivity?
spk21: Yeah, David, this is Blake. I'll take that one. You know, in relation to the Wyndham Road, but also all of our development in Culberson and Rees County, we own and operate our own midstream systems. Actually, about 70% of our operated gas and our operated water goes through our Cotera midstream assets. So we have tremendous control. These are systems we have developed over years. Triple Crown, for example, in Culberson County, is tied into over five different processors that we can shift gas around to, which gives us a ton of reliability. In addition, we have multiple natural gas residue outlets, and that just gives us a ton of flexibility and confidence in being ready for these big projects. In New Mexico, we are a third party on the majority of our assets. That requires a lot of planning for all the reasons you alluded to earlier. But we have some pretty good service partners, and we have found as long as we stay far ahead of our projects, they'll be ready for us.
spk00: I appreciate that. And maybe just so I better understand the comments around the Marcellus spends next year, it seems like it's being phrased as though it's an option to spend $200 million less. But I guess, is that the correct way to think about it, or is there really – you know, 100 million plus of efficiency gains in there or just program changes just from designing better plans into next year?
spk17: Well, David, what I said in my opening remarks is as we throttle into the year, we're currently in a cadence where we would, if we didn't change, we would hold production flat and be able to realize those savings. But, you know, we also have on-ramps and off-ramps. You know, I talked about planning. And one of the things that I'm most pleased about with our current program is whether we're talking about the Permian, the Anadarko, or the Marcellus, each one of those plans has places where we can accelerate or decelerate if conditions change. We've thought ahead, we've pre-planned, and we can react. And so right now, as we enter into 2024, we're going to be on a flattish Marcellus cadence. And I would say you would probably see us increase rather than decrease from that if conditions warrant it.
spk03: Thank you, Tom.
spk01: Your next question comes from the line of Josh Silverstein with UBS. Your line is open, Josh.
spk20: Hey, thanks. Good morning, guys. Just sticking with the Marcellus, the realizations have been pretty strong this year. and even better than the corporate realizations. I know some of this is from the NYMEX and fixed price contracts that you guys have. You outline what you have for the rest of the year. Can you just provide us a little bit of insight as to what you guys have next year and any thoughts on kind of what you can do for locking in strong basis relative to what the forward curve may be? Thanks.
spk21: Yeah, Josh, this is Blake. I'll take that one. We don't really see a change, you know, going from 23 to 24 in our portfolio, we're expecting to realize about 85% of NYMEX this year. That is driven by a big portfolio that's anchored to a lot of out-of-basin indexes that give us exposure to strong pricing in the winter and also a lot of NYMEX pricing built in there. So, we don't see a big change from 23 to 24 in how that portfolio is managed. Great.
spk07: I would just say, even though the second and third quarter, you know, that realization is a little lower. If you look year to date, that's right about where we're tracking year to date.
spk20: All right. Yeah. Thanks for that. And then just on managing the cash balance, I think Tommy said he wanted to have about a billion dollars of cash on hand. Can you just talk about the flexibility in this? I think you still plan on paying down the third quarter maturity next year with cash, but Could this cash also be used to support shareholder returns potentially above 100% of free cash flow if crude oil and natural gas prices move lower? Thanks.
spk07: Yeah, I'll jump in there, Josh, for a second here. So, look, on the cash balance, again, if you look back over the last, let's call it, you know, year and a half or seven quarters, you know, sort of been between, call it maybe a little over $600 million, a little below $1.5 billion. So, we sort of gravitated around that $1 billion gap. balance. I think we do want to be able to be countercyclical with regards to shareholder returns. So if we're in a period like the second quarter where free cash flow is a little bit tighter, we can certainly go beyond with that, in some cases well beyond that, in order to continue to support if we think there's intrinsic value in doing that with the share repurchase program. So we certainly have that ability going forward. The other thing I would just touch on quickly is next fall's maturity, the 2024. And just to highlight, no decisions have been made on that. And so I think you sort of indicated that we'd likely repurchase that or pay that off for cash. And that's certainly one of the options. And we think we have a lot of different options. But I'll just sort of temper that a bit and say no final decisions have been made on that maturity.
spk03: Got it. Thanks.
spk01: The next question comes from the line of Derrick Whitfield with Stifel. Derrick, your line is open.
spk10: Good morning, and congrats on a strong quarter and update. Perhaps for Tom or Blake, one of the majors on the back of a recent acquisition talked about the potential to double or recovery with new tech. As a technical forward-leaning organization that's been in the basin for quite some time, Are there any developments that you're aware of that could drive that degree of improvement in recoveries?
spk17: Yeah, I'll start that. And Blake may want to comment. You know, we followed that topic carefully. There are a couple of companies kind of talking about that. And, you know, I wish I could tell you that we had some back laboratory where we have our own version of it, but we don't. We were watching very carefully. We certainly hope it's true. But we don't see evidence that it's been field tested yet in any meaningful way. So, Blake, you want to comment?
spk21: Yeah, I just echo what Tom says. We're highly curious. We ask about it all the time. But today, we haven't seen anything show up in the data that would show some technologies being widely used. So, we'll continue to pay attention.
spk10: Great. That's my follow-up. Referencing slide 17, I want to take it with really a different angle with my question. As you think about the go, no-go decision on co-development of Harkey and the western spacing units of the Wyndham Row, what's the downside of co-development from an upstream perspective if well-level returns are largely consistent?
spk17: Yeah, I don't know that I see a downside other than midstream activity. And, you know, we do have a certain amount of capital that we want to deploy. So if we were to co-develop, it would be increased capital. You know, we've looked at this pretty hard. Certainly within our assets, there are areas where there's more interference between the Wolf Camp and the Harki than there's areas where there's little observable interference. Even where we see interference, those harkey wells are landmark wells. I mean, even if you say, you know what, you're going to drill the wolf camp, come back sometime later and catch the harkey, the returns on that harkey layer, even with depletion effects, are outstanding.
spk03: Great, Keller. Thanks for your time.
spk01: Your next question comes from the line of Neal Dingman with Truer Securities. Your line is open, Neal.
spk08: Good morning, all. Thanks for the time. Tom, my question, I think I'd ask them the capital allocation a little differently. You all previously had well above, you know, what I'd call in prior, call it a year or two ago. What I always would deem is definitely well above average production growth and what I would probably call then probably average shareholder return. And then, you know, obviously here in the recent quarters, you've kind of reversed that where you now have well above shareholder return with what I would call probably the average production growth. I'm just wondering, Tom, for you, again, is there a scenario where you would revert more back to that prior scenario? The prior scenario being above average production growth?
spk17: Is that what you're saying?
spk08: Yes, sir. And more back to the, you know, instead of a 90% payout on the shareholder return, maybe back to, I don't even know, 50, 60 or something.
spk17: I think we like our current approach. Under current conditions, I always want to say that, look, if the world changes, the last thing you should want me to say is, nope, we're going to just keep doing what we're doing, even though the world has changed all around us. We have built Cotero to be flexible, but under current conditions, we're pretty solid in our current approach. Shane, anything you want to say to that?
spk07: No, I would agree with it. I mean, I'd only say, Neil, again, you know, we have a lot of peers today that are probably more focused on just maintaining and keeping things flat. And so I think in that regard, Cotera is differentiated in that we can still generate consistent, profitable growth in the current price environment that we sit in.
spk08: Yeah, great, great add-on, Shane. I agree with that. And then second question, just on the cost reductions, very noticeable on, you know, we talked about the semifracts. having potential for the 5% decrease and, you know, taking the Culberson cost all the way down up to 15%. Do you remind me, you know, prior to this or, you know, a quarter or two ago into deflation next year, were you all just thinking kind of maybe a 5% deflation? I'm just wondering kind of how you're looking at sort of total, I don't know if you want to call it deflation, Tom, but sort of all in lower cost next year versus maybe what expectations were a quarter or two ago.
spk21: Yeah, for the total program, we're still estimating about 5% deflation going into 24. That's based on what we know today. These simulfrac savings would be in addition to that, but that's just for this one project, and we have a big portfolio, so it's not an across-the-board savings. We're in the middle of negotiating our rig and frac contracts for 24 right now, and look forward to updating that when we put our plan out in February.
spk02: Thanks, guys. Great update.
spk01: Your next question comes from the line of Matt Portillo with TPH. Your line is open, Matt.
spk05: Good morning, all. Tom, maybe a question on the Anadarka Basin to follow up on Doug's question. Sounds like next year you'll have a relatively healthy level of activity, but I was curious maybe looking into the medium term. It is an asset we still have. about 240 locations that compete for capital. It's also a basin that seems to be well situated to meet some of the pull of demand from an LNG perspective. Just curious what you'd need to see either from a cost perspective or wealth productivity perspective or maybe a macro change to see a healthy level of rig activity in the basin moving into the second half of the decade.
spk17: Well, look, what I'd love to see is a long-term LNG contract that guarantees us an uplift in price, and then we'd be willing to get after it. So I'm looking at Blake, getting him working on that. You know, we do have an amazing asset in the Andarco Basin. It's ready to go. I mean, when we look at the Permian, the Marcellus, and the Andarco, Cotera is very well positioned for exactly what was designed when we formed it. we can react to liquids prices or natural gas prices with a healthy inventory. And when I say healthy, I mean a deep and robust inventory. And I really hope people are seeing that in our asset base. But we would have that option. Blake, you want to comment on that?
spk21: Yeah. The Anadarko is very well positioned for LNG. It's gotten straight shot to the coast. There's lots of new facilities coming online there. All of them intrigue us. As Tom said, we'd love to find one that guarantees us some great tailwinds to our cash flow. We haven't found that yet, but we're focused on how do we do an LNG deal that minimizes our total cost but also gives us some flexibility because we do like to move capital around, and we'd hate for the tail to end up wagging the dog on that.
spk05: Perfect. And maybe just to follow up on gas specifically, Tom and team, just curious how you all are feeling about the hedge book heading into 2024. It still seems like it might be a bit of a transition year with some challenges on the inventory carryout from 23. And so just wanted to see how you all are thinking about your hedge profile for next year and then maybe longer-term philosophy around hedging for natural gas.
spk17: Yeah, Shane, why don't you take that? Yeah, sure.
spk07: So over the course of the last quarter, we did add some hedges to the book. And, again, I think historically we've been pretty consistent in messaging. We want to be somewhere between 20%, 25% to upwards of 50% hedged in any sort of forward 12-month, 18-month window. And so we try to get back into that posture. I think as you look today, we are positioned that way, you know, plus or minus hedges. around 25% to 30% on the gas side, if you include the physical hedges and the financial hedges in concert. And we think that's a good place to be, but we'll continue to monitor it as we go. You'll also find that if you just look at the shape of that hedge book, it is probably a little bit front half of the year weighted, a little less second half, not to any extreme, but there is a little bit of a slope to that profile.
spk03: Thank you.
spk01: Your next question comes from the line of Roger Reed with Wells Fargo. Mr. Reed, your line is open.
spk06: Yeah, thanks. Good morning. Come back to some of the productivity questions. There's obviously a portion of it you've talked about that's above ground driven, and there's a portion that's below ground driven. I think the above ground is not too hard to understand from a logistic standpoint, you know, EFRAC switchover. But the below ground, what have you been able to do there that's led to better performance per lateral foot?
spk17: Well, you know, one of the things we've done, Roger, over the last few years is really spend a tremendous amount of time studying the optimum development scheme for a drilling spacing unit. We have a little different spacing assumption than others. And I think as we apply that throughout our portfolio, we're seeing ongoing benefits from it. We think that with fewer wells, we can extract the same amount of resource. Our machine learning team has been instrumental to Cotera in that understanding. And they continue to drive a lot of our thinking. It's been a remarkable piece of technology to adopt internally. and it's had direct benefits in our capital efficiency.
spk06: As we think about wider states, how does that factor in with the total inventory? Are we talking about enough of a runway that you're not concerned over the next several years?
spk17: Yeah, you were breaking up there, but I believe your question is with water spacing, how does that impact the duration of our resource? We model that into everything you see in our deck. That's modeled in. And, you know, we don't count number six on the map, quite frankly. Although, you know, everybody loves a high number there. We look at, I mean, if we can drill fewer wells and get better financial returns and not leave stranded resources, That is the holy grail, and we think we're never there, but we're moving in that direction in a very positive way, and that's part of what's underwritten our results this quarter.
spk06: All right, thank you. Apologies for the breakup.
spk01: Your next question comes from the line of Leo Mariani with Roth. Leo, your line is open.
spk18: Yeah, I just wanted to ask on the seventh permanent rig here, It sounds like that was kind of always part of the plan, and perhaps you guys just accelerated it. So I just wanted to confirm that was something that was going to be in place kind of all year in 2024. So, I mean, it sounds like you're probably going to have a little bit more all-in permanent activity next year.
spk17: Well, I'll tell you, if that was pre-banked, there are a lot of people down the hallway that have scars from us fighting over that. But I'll let Blake answer the question. Yeah.
spk21: Yeah. I'd say the real impetus was the Wyndham row, like we've talked about. That's a big project. We want to be well ahead of it to give us lots of timing. The drilling cadence associated with that project only had us picking up the rig early in 24, and we just decided to buy ourselves a little time and pick it up early. We were able to contract a great rig with one of our strong service providers, and it was hot and ready to go, so we jumped on it.
spk18: Okay, so just wanted to get a sense, I mean, is that going to give you guys a little bit more permanent activity then, just on average? Sounds like they're going to be running a little bit more equipment next year.
spk17: No, it really just accelerates the project. It wasn't a big material shift. We had plans to bring that rig in next year anyway.
spk18: Okay, understood. And then I guess, Tommy, you talked about this a couple times, but, you know, you got the multi-year guide. You're going to update that, you know, early next year. And it just sounds like, you know, clearly you've outpaced expectations in 2023. It just seems like if we continue to see strong well results, you know, out of Cotera, you've got this guide of oil of kind of 5% plus. If trends continue, it seems like we'd be a little bit more of the plus as opposed to the five as we roll into next year.
spk17: Well, we're currently at five plus and we'll look forward to discussing our plans when we roll them out. We're still having some iterations, but we are seeing great asset productivity and we expect any surprise to be the upside. Now, that said, we also operate in a world where things go wrong. I mean, we're not immune from train wrecks operationally. We avoid them as best we can, but I think if you look at our sector, any kind of operational interruptions are always part of our business, so we like to promise what we think we can deliver.
spk02: Okay, thanks.
spk01: Your next question comes from the line of Charles Meade with Johnston Rice. Charles, your line is open.
spk12: Good morning, Tom, to you and your team there, and thanks for going over the hour mark here. This perhaps dovetails with that last question on your outlook for 24, but I want to start specifically with your 4Q oil guide, which was stronger than many of us from the outside looking in were expecting. Perhaps this also fits with your other comments about volumes or volume growth is really an output, not a driver. we look at your sequential quarters over the course of 2020, we can see that, and that the oil rate has ticked up and it's ticked back down, and you're going to have a big tick up for Q4. So my question to bring you to a point is, how would you encourage us to look at this 4Q, your 4Q volumes? Is this one of the, a big uptick that's likely to mean revert, or... Or is this more along the lines of a new baseline that you guys are looking at that you're going to build on?
spk17: Well, we haven't, as you know, specific plans for 24. But, you know, we carry a lot of operational momentum into 24. Now, that doesn't mean that you take the extra rate and just keep it going up to the right. You know, when we talk about growth, we're talking about annual numbers. But, you know, what we're seeing with a lot of these projects that we discussed, such as Windham Row, is we're seeing less seesaw in that production profile, and we'll be working hard to maintain that. And 24 had less seesaw. We'd like to have smooth operational cadence and kind of dampen the volatility in that production profile.
spk12: And I guess maybe just for my follow-up, can you elaborate on what Seesaw is?
spk17: Well, Seesaw is up and down significantly quarter over quarter. But again, we're not prepared to discuss anything in specific about 24 on this call. I think our three-year guide of 5% plus on oil is a reasonable expectation, and that's kind of –
spk03: you know, where we're setting kind of a starting point on a planning process.
spk01: Ladies and gentlemen, there will be no more further questions at this time. I would like to turn the call back over to Tom Jordan for closing remarks.
spk17: Well, I want to thank everybody for joining us this morning. Again, we're very pleased at Cotera to be delivering excellent results for the third quarter. But I'll finish where I started. We expect this out of ourselves, and we think you should expect these from us. So look forward to delivering consistent performance over time. Thank you very much.
spk01: Ladies and gentlemen, that concludes today's call. You may now disconnect. Have a great day.
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