Centennial Resource Development, Inc. (NASDAQ:CDEV) Q2 2022 Earnings Conference Call August 4, 2022 10:00 AM ET
Company Participants
Sean Smith – CEO
George Glyphis – EVP & CFO
Matthew Garrison – EVP & COO
Hays Mabry – Senior Director, Investor Relations
Conference Call Participants
Scott Hanold – RBC Capital Markets
John Annis – Stifel Financial Corp.
Danny Pelton – Truist Securities
Operator
Good morning and welcome to the Centennial Resource Development’s Conference Call to discuss its Second Quarter 2022 earnings. Today’s call is being recorded. A replay of the call will be accessible until August 11, 2022 by dialing 877-344-7529 and entering the replay access code 4165341 or by visiting Centennial’s website at www.cdevinc.com. At this time, I will turn the call over to Hays Mabry, Centennial’s Senior Director of Investor Relations, for some opening remarks. Please, go ahead, sir.
Hays Mabry
Thanks, Chris. And thank you all for joining us on the company’s second quarter earnings call. Presenting on the call today are Sean Smith, our Chief Executive Officer; George Glyphis, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer. Yesterday, August 3, we filed a Form 8-K with an earnings release reporting second quarter earnings, as well as operational results for the company. We also posted an earnings presentation to our website that we will reference during today’s call. You can find the presentation on our website homepage or under presentations at www.cdevinc.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and some plans.
Many of these risks are beyond our control and are discussed in more detail in the risk factors in forward-looking statements sections of our filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which is expected to be filed with the SEC later on this afternoon, although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results or developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website.
With that, I will turn the call over to Sean Smith, our CEO.
Sean Smith
Thank you, Hays. Good morning and welcome to Centennial’s second quarter earnings call. During the quarter, the Company generated very strong operational and financial results with a significant increase in product levels, strong pricing realizations, record free cash flow, a substantial amount of cash on the balance sheet and a low leverage profile. Before George covers the quarterly results in more detail, I’d like to provide a brief update on our pending merger with Colgate Energy. Overall, I’m very pleased with the tremendous progress that’s been made since the announcement. As you’ve likely seen from last week’s definitive proxy filing, the shareholder vote is scheduled for Monday, August 29 and we expect to close shortly thereafter. Both the Centennial and Colgate teams have made significant progress on the merger integration so that the new company will hit the ground running on day one.
With all of that said for the purposes of today’s call that will be the extent of my remarks related to the Centennial-Colgate merger. Around the time of closing, senior management will provide a fulsome company update which will include forward guidance, anticipated drilling and completion activity and details on the return of capital program amongst other things.
Now, I’ll turn it over to George to cover the results for the second quarter.
George Glyphis
Thank you, Sean. Turning to our financial and operational results which can be referenced on Slides 4 and 10 of the earnings presentation. Q2 results were quite strong as a significant increase in production levels and higher commodity prices drove record free cash flow and a material decrease in leverage. Net oil production for the second quarter was approximately 36,700 barrels per day which was a 12% increase relative to Q1. Average net equivalent production increased 14% compared to Q1 and totaled 70,240 barrels per day. Total revenues increased by 36% to approximately $473 million with a 33% increase in oil revenues, a notable 74% increase in natural gas revenues and a 21% increase in NGL revenues.
Unit cost for the quarter benefitted from the increase in total production in addition to continued cost control in the field. Compared to Q1, Q2 LOE of $4.52 per barrel declined 13% and cash G&A of a $1.95 per barrel was down approximately 8%. GP&T was up slightly at $4.03 per barrel primarily as a result of strength in natural gas prices. The Company generated approximately a $137 million of free cash flow during the quarter which was inclusive of $5.7 million of merger related expenses. This represented a 55% increase in free cash flow compared to Q1. Adjusted EBITDAX totaled $297 million which was up approximately 37% from Q1. Lastly, net income for Q2 totaled approximately a $192 million. Turning to CapEx, during Q2 Centennial incurred approximately a $141 million of total capital expenditures.
We spud 19 wells during the quarter which was six more wells than were spud in Q1. Additionally, we completed 13 wells during the quarter and also incurred capital from additional wells that were ultimately completed in early July. Overall, capital levels increased on a quarter-over-quarter basis as a result of higher drilling activity tied to the temporary usage of spudded rigs, a 17% increase in the average completed lateral length and general OFS inflation. On Slide 5, we summarize our capital structure, leverage, and liquidity.
As of June 30, we had approximately $200 million of cash on hand and no borrowings on the revolving credit facility. As a result, total net debt was approximately $615 million and net debt-to-LTM EBITDAX declined to 0.7 times compared to 1.1 times at the end of Q1.
Finally, I wanted to note that Centennial has been unable to repurchase any company stock due to restrictions related to the pending Colgate merger. We look forward to communicating the new company shareholder return program around the time of closing.
With that, I’ll turn the call over to Matt to review operations.
Matthew Garrison
Thank you, George. Q2 was another solid quarter for the operations group. Turning online some strong wells while sustaining our operational efficiencies gained to-date on the drilling and completion side. More specifically, our completions crew continues to impress as we believe it is one of the most efficient Zippia crews in the Delaware Basin. Overall, our fleet has averaged approximately 2000 feet of lateral stimulated per day for the first half of the year which compares the 1700 feet per day in 2021. This nearly 20% increase in footage per day is another example of Centennial operations driving additional efficiencies in the field and informed our decision to implement a spud to rig program for the portion of the quarter to assist with the drilling of the first and second intermediate sections. As a result, we spud 19 wells during the quarter, which represents a 58% increase versus our quarterly average for 2021.
Turning to well results. Our operations team brought online some outstanding wells in the second quarter including four out of our top 10 wells in company history. Located in Lee County, the Tostada and Gordita package was a five-well grouping targeting the Third Bone Spring Sand. This development averaged just shy of 10,000 foot lateral lengths, the IP30s for the package were approximately 3000 BOE per day which is 84% oil or 2500 barrels of oil per day per well.
Additionally, the Tostada 602 saw single-day production numbers that exceeded 5400 barrels of oil per day while the Tostada State Com 601 and Gordita State Com 602 and 603, each posted single-day production numbers exceeding 4100 barrels of oil per day per well.
These are fantastic wells and I’m extremely proud of our operations and asset teams for delivering these results.
A little further south in New Mexico, the Airstream wells were drilled as a three-well pad, also targeting the Third Bone Spring Sand interval with approximately 9800 foot lateral length on average. Like the Tostada and Gordita package, production numbers were strong, posting IP30 numbers of almost 2300 BOE per day or 1900 barrels of oil per day. Overall, our team did a tremendous job during the first quarter brining online some strong wells and puts us on our front foot heading into the merger.
Turning now to ESG on Slide 6, we recently released our second annual corporate sustainability report which covers 2021 performance and is available on our website. I’m extremely proud of our employees and the ownership they have taken relative to our ESG initiatives.
In this year’s report, we introduced our alignment with the taskforce on climate related disclosures framework, expanded our emissions reporting to include Scope 2 disclosures and expressed our commitment to the World Bank’s initiative to end routine flaring by 2030 which we have already implemented in our operations.
With regard to performance, we reduced our 2021 Scope 1 greenhouse gas intensity rate by almost 30% year-over-year, lowered our flaring rate to 1.2% compared to 4.4% in 2020 and increased our recycled water usage by 17% year-over-year. These are just a few of the highlights from this year’s annual report and I encourage everyone to review it further at your convenience. Also in Q2, we completed the buildout of our merchant water recycling facility in Lee County in New Mexico. This facility is capable of recycling 1 million barrels of water each time it is filled up to capacity.
The wells within the operational area of this recycling facility, we believe our recycling efforts will save on average approximately $100,000 in completions related costs per well, not to mention the additional LOE savings associated with the project. It is our goal for future wells in this area to utilize 90% to a 100% recycled water going forward. This water recycling facility is just another example of our operations teams’ pursuit to generating cost savings opportunities across every discipline.
To wrap up, I’d like to make a couple of comments about my thoughts relative to the future of the combined company. After spending time with both the Colgate and Centennial teams, one thing has stood out to me and that is the quality of the employees in both companies. Upon closing, I believe that we will have one of the highest caliber employee bases in the industry. And I’m proud to lead the operations and technical teams in the next phase of this company’s history.
With that, I’ll turn the call back over to Sean for closing remarks.
Sean Smith
Thank you, Matt. The Centennial team is performing at a very high level. Turning back to Slide 4. You can see that during the quarter, we increased oil production volumes by 12% delivering almost $300 million of EBITDAX, generated record free cash flow of approximately $137 million, reduced total net debt by a $150 million and lowered our leverage to 0.7 times. Combined, this provides us with very strong operational and financial momentum headed into the combination with Colgate Energy.
In closing, I’m truly excited for the company’s next chapter and I couldn’t be more grateful for our employee’s hard work and dedication over the years and during the integration period. Upon closing, the combined company will have a high margin, low-cost asset base with an extensive portfolio of long dated high return inventory capable of delivering significant shareholder returns.
We look forward to closing the transaction shortly after the shareholder meeting which is scheduled for later this month. Before we go into Q&A, I’d like to remind everyone to please hold your questions related to the pro forma company as we expect to provide more details on the combined company at closing. Thanks for listening, I’ll now we’ll go to Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Today’s first question comes from Scott Hanold with RBC. Please proceed.
Scott Hanold
Thanks, good morning. Just curious on the well that you drilled this quarter, it seemed in the second quarter seem like you had a number of them that as you put it where company records. Can you talk about what’s going on there, is that more geology, are they techniques that you’re tweaking and then also if you can add a little bit of color on the cost savings you get for using the spud to rig and obviously drill in the long collaterals.
Sean Smith
Sure. I’ll go ahead and kick that one off with the — with some of those well results. This well, the Tostada and Gordita wells are located in our Northern prior block which is kind of the big central block in our Lee County acreage. And it’s been an area that traditionally we’ve been developing across multiple different horizons. Second Bone Spring is more of the historical well result that we’ve been talking about. These new wells are now in the third Bone Spring below the second Bone Spring. And they represent kind of our best practices to-date. Right, with regard to targeting and well spacing and our most modern and up-to-date completions designs that we’ve been looking at over the past several years.
So we believe the well results themselves are the reflection of our ability to develop multiple zones as well as the larger packages of wells which I think historically we’ve done prior to 2022, our average pad size were in the range of two to three well pads. These are much more robust development packages. So we’re seeing a lot better ratios of parent type performance of these wells as we start to really develop larger packages of wells. And our infrastructure set up in New Mexico at this point is able to accommodate those larger packages of wells as we’ve grown into that asset and been able to make sure that we’ve got the ability to do these large package as well. So we think it’s kind of the combination of a bunch of different things, geology on the forefront and then our operations ability to execute larger packages of wells and flow them back the way we’ve been doing it.
But very good results I would say. It’s not really surprising to us. We always view that acreage is top tier. And so, we think that these results are in line and exceeding some of our even our some of our internal expectations but that bar is high. Maybe turn into the spud to rig now. I’ll address some of that. The reason the spud to rig program was set up is because our completions efficiencies have skyrocketed this year. We’re very pleased with the average cycle times of our completions crew at 2000 feet a day average treated lateral lengths. That really forced us to consider with the size of our program, the ability to balance that increased pace on the completion side with our drilling cadence.
And so, the way we see that spud to rig is it’s it really further compresses our cycle times and it allows us to run still with the two rig primary program and the single frac spread and balance those two schedules out together adjust fundamentally as the completions cadence has significantly uptick this year.
Scott Hanold
Okay, that makes sense. And I appreciate the fact you don’t want to get too much into the pro forma for the merged companies. But maybe if I could ask a question on just how are you seeing inflation. How are you all set up with inflation from here going into 2023? And yes, when you think about the combination of Colgate and Centennial, how does that sort of potentially mitigate some inflationary pressures in your view?
Matthew Garrison
I could start with that and then I can, I’ll pass it around the room if anybody needs. This is Matt again. One of the things we really sought to do between the two companies is look towards the size and scale component as a way to avoid having to do things like for example the spud to rig as a whole weaken. And the new company where there’s more rig activity, more acreage positioned, there’s opportunities for us to do things on a larger scale with regard to rig and fleet activity.
I would think some of that maybe in the form of different vending — vendor companies, third parties and we have to still kind of work through some of that. As it pertains to things that we can control, we’ve done our best to lock in pricing on some of the tangible elements like steel, and casing, as well as sand, contracts and things like that.
Those have been done both independently by the company is heading into the merger. And we are pleased with how both companies have managed those independent of one another. So we believe we’re in a very good place heading into the new company to be able to mitigate and address a lot of those inflationary concerns. And frankly, we see a lot of opportunities to bring our cycle time reductions and our completions, cycle times over in the new company that this is going to keep the pressure on those costs heading in the right direction.
Scott Hanold
So, like what do you think the leading edge inflationary is pressures are into 2023, will you — you have, do you have an opinion on that yet?
Sean Smith
Yes Scott, I’ll take that. Is it’s, we’re still working through some of those things obviously with the combined company. We’re looking for operational best practises as well as syncing up rig cadences and things like that. So there’s a lot to work on the capital side. Obviously we think there is going to be pressure, prices remain high where they are today, although my guess is that it’s starting to level off. Some prices have backed off from their previous high. So I think we’ve seen a lot of the major inflationary items already hit and they’re already priced into our current budget. So without giving you too much more specific, I would say look forward to releasing kind of forward-looking capital guidance and rig cadence after we close the deal.
Scott Hanold
Understood, thanks.
Sean Smith
Thanks, Scott.
Operator
The next question comes from John Annis with Stifel. Please proceed.
John Annis
Hey, good morning. For my first question, I want you to touch on the inflation reduction and specifically the minimum tax and missing fee components. Could you speak to the expected implications for Centennial?
Sean Smith
Sure. I’ll take a look at that. I’ll take the first out of that and George can chime in if he needs to. Yes, we certainly are aware of that and have been monitoring that as it comes along and understand what is at least initially being proposed. Obviously there’s a lot of legislation that still has to take place for that to get passed. And we’ll see what form that takes. There are certain limits that they are proposing on the size of the company based on amount of income and that you generate. And so, we’ll see how all that comes together and how we need to forecast that for the pro forma company. But as of right now, it’s just, it’s kind of a latency in monitor mode. And we are certainly on top of that from a regulatory and government relations point-of-view and making sure it gets forecast if should it become legislation when it gets voted upon.
John Annis
Got it. And building off with Scott’s question on the Tostada and Gordita package. Was there anything specific in the geology or development approach of those wells that strengthens your view on the implied value of Colgate acreage or is the geology somewhat different between those two areas?
Sean Smith
The geology is quite different between the two areas. But I have also seen well results in the Eddy County assets. And they’re extremely economic in different ways. I mean, the shallow we’re drilling costs — the lower cost overall with completions and then the study and solid production that comes from the Eddy County assets both in the second and the third Bone Spring Sand are very comparable in terms of asset quality and just the sheer size and scalability of that asset in Eddy County. But the geology is very different from one area to the other with the exception of the formation names. I mean, the formation names are common but the quality of the rocks are very different. And so, the way we will execute the Eddy County assets is going to be different than the way we execute the Lee County assets.
John Annis
Makes sense. Thanks for taking my questions.
Sean Smith
Thank you.
Operator
[Operator Instructions] Our next question comes from Danny Pelton with Truist. Please proceed.
Danny Pelton
Hi, good morning. I was wondering if could talk about some of the operating efficacies specifically you all continue to highlight expand the laterals. So I’m wondering how much higher returns do you all assume the longer lateral ads.
Sean Smith
They are giving specifics on that. I think that’s, we continue to push where we can on extending laterals. Longer laterals tend to be better from an efficiency point-of-view and generate higher returns. We average, it was 8000 or so of lateral fee for this quarter. And anywhere we can push that we will. That’s one of the interesting things about the combination with Colgate. We think there are some opportunities there to continue to extend laterals. That being said, it’s not a brand new thing for us. We have been doing this for a few years now and just look for any opportunity we can to drill longer laterals. Our average well going forward is typically a lean storage, a two mile lateral. And so that’s how we think we’ll be developing the assets on a go-forward basis and I think it’s the most efficient way going forward.
Danny Pelton
Okay, great. Thank you, very much. And then my second question is on pad size. How large of a well packages should we think about in the near term?
Sean Smith
Yes. It’s a good question there Danny. What we’ve been working on over the past couple of years is building out pad sizes from smaller incremental numbers in the past historically two wells and three wells, two more robust three, four and five-well packages are on average. I would say that answer varies by the asset in which we’re developing. Some of the assets just have different well spacing assumptions and so more packages of wells and more of a stacked component can be what you might expect to see. In some areas like the Lee County assets or even some of your assets in Reeves County, those may be different on the order of threes, fours and five well.
So I think the opportunities to put more wells on the pads, they really emerge across areas where there’s mature infrastructure in place where we know we have the flow capacity to take that kind of volume relative to the initial flow backs. But I wouldn’t be surprised if you continue to see well packages that vary between three and six on average, with the occasional higher sized pad being thrown in just by virtue of proximity to known infrastructures and things like that.
Danny Pelton
Okay, great. Thank you. That’s it from me.
Sean Smith
Thank you.
Matthew Garrison
Thanks, Danny.
Operator
At this time, there are no further questions in the queue. And this concludes our question-and-answer session as well as our conference. Thank you for attending today’s presentation. And you may now disconnect.
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