Ranger Oil Corporation (NASDAQ:ROCC) Q2 2022 Earnings Conference Call August 3, 2022 10:00 AM ET
Company Participants
Rusty Kelley – Senior Vice President and Chief Financial Officer
Darrin Henke – President and Chief Executive Officer
Julia Gwaltney – Senior Vice President and Chief Operating Officer
Conference Call Participants
Neal Dingmann – Truist
Michael Furrow – Johnson Rice
Davis Petros – RBC
Nicholas Pope – Seaport Research
Operator
Good morning, and welcome to the Ranger Oil Corporation’s Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Ranger’s Senior Vice President and Chief Financial Officer, Rusty Kelley. Please go ahead.
Rusty Kelley
Good morning. And thanks for joining us today to discuss our second quarter results and the strong progress we’ve made year-to-date to create lasting value for our shareholders. I’m joined today by our CEO, Darrin Henke; and our COO, Julia Gwaltney. We’ll be happy to take your questions at the end of the brief remarks today.
Please note that we’ll discuss certain non-GAAP measures on today’s call. Definitions and reconciliations of these measures to the most comparable GAAP measure are provided in our second quarter earnings release and presentation, which can both be found at www.rangeroil.com.
Our comments today will contain forward-looking statements within the meaning of Federal Securities Laws. These statements are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward-looking statements, including those identified in the Risk Factors in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
I’ll now hand it over to Darrin.
Darrin Henke
Good morning, everyone, and thanks for dialing in. Ranger has executed extremely well year-to-date. Yesterday, we published strong second quarter results along with an updated slide deck. I hope you’ve had a chance to review these materials. In less than two years, we’ve transformed Ranger into an E&P leader, and now have all the key ingredients for premium market valuation.
Simply put, we are answering the call for what investors are looking for from the E&P sector today. First, our business strategy is well defined. We have flexibility to deliver value through multiple vehicles. These include strategic and accretive acquisitions at the right price. Discipline capital investments within a strong balance sheet, organic and profitable growth, operational expertise that creates synergies and strong returns and a clear framework to return cash to shareholders.
We recently expanded our cash return framework. Our board reloaded our share buyback program, increasing our authorization to $140 million and extending the program through June 2023. Year-to-date, we have repurchased more than 3% of our outstanding stock and remain active in the market today.
At current valuations, we see repurchasing our shares today as a very compelling investment. Due to the strength of both our performance and capital structure, we accelerated the timing of our inaugural quarterly dividend and increased its planned initial payout. Our board declared a quarterly dividend of $0.075 per share payable August 4.
Our balance sheet has continued to strengthen, our leverage ratio dropped to approximately 0.8 at the end of the second quarter, as we reduced our debt by an additional $50 million in the first half of the year. Second, recent bolt-ons have created significant value. We are incredibly excited about the eight strategic and highly accretive bolt-ons announced this year. These transactions which closed late in the second quarter and early in the third quarter added about 20,000 net acres and transacted at a discount to our estimate of the proved developed PV-10 value of the assets. Combined, their initial purchase price totaled about $139 million and were funded substantially through cash flow.
Our team has been laser focused on finding attractive opportunities within our Eagle Ford footprint. Because of their fit and our operating capabilities, we expect strong returns through synergies, increased working interests, longer laterals and the utilization of existing infrastructure. Please refer to the map in today’s presentation to see our expanded footprint.
A healthy deal flow exists in the Eagle Ford today. We’ve been able to selectively screen for transactions, where we see opportunities to lower costs and improve cycle times, to access premium markets and generate free cash. The operational synergies inherent in these transactions mitigate the need for additional rigs and services, thus improving certainty in our cycle times and helping offset inflation.
We have proven our ability to find and close deals that create meaningful value. Next, we have a deep inventory of high return future drilling opportunities. Our recent bolt-ons strengthen our already deep inventory. We have an estimated 20 year inventory at today’s commodity prices, which equates to about 1,000 locations, primarily developing the lower Eagle Ford shell.
Lastly, we are operating on one of the best basins in the United States. We have an exceptional team of people at Ranger today, focused on continual improvement in everything we do. Our results are among the best in the Eagle Ford and stack up to anyone. That being said, all basins are not created equal. The Eagle Ford is one of the most attractive basins in the U.S. due to its high oil cut, existing infrastructure, close proximity to premium priced Gulf Coast markets and an efficient regulatory framework.
These attributes yield a superior margin. In today’s slide deck, there’s a slide that highlights our EBITDA margin compared to public E&P peers, sorted by basin. As you will see, we are certainly advantaged due to our high margin. We delivered strong financial performance in the second quarter, exceeding analyst expectations during the period. Our pro forma adjusted free cash flow was $62 million and we had net income of $148 million.
Adjusted EBITDA was $190 million. Production once again came in at the upper end of our guidance range. Total sales were about 38,500 barrels of oil equivalent per day. And our oil sales were about 27,500 barrels per day. Costs and expenses were all within previous guidance ranges. There is no doubt that inflationary pressures are real today. However, I’m exceptionally proud of how our team has managed our business against those pressures. For the second quarter, our drilling and completion capital investments were $122 million, as we found innovative ways to mitigate higher costs.
Let me talk a little more about our 2022 outlook. Our capital plans for the remainder of this year fall into two key areas. First, we expect the capital for our initial 2022 drilling and completion program to remain within our original guidance at $425 million, which included adding a third spot rig in the second quarter to develop a couple high return pads in LaSalle county. This temporary drilling and completion activity will conclude in the third quarter. And we expect to drop back to a two rig program for the balance of the year. At current commodity prices, we believe these spot rig investments will reach payout in about one year and will be additive to our 2023 forecast.
Second, because of our ongoing operating efficiencies driving accelerated development activity, combined with increased working interest and longer laterals associated with the recent bolt-ons. We expect about $30 million of incremental drilling and completion capital. These investments are expected to increase our volumes in late 2022 and provide us with considerable momentum as we enter 2023. With the incremental drilling and completion CapEx, our new annual CapEx guidance range is $440 million to $470 million.
More detail on our capital program can be found in our slide deck and earnings release. As we look to 2023, we are evaluating the addition of a full-time drilling rig to next year’s development program, expanding our historical two rig fleet to three rigs. In summary, we continue to make disciplined investments in the Eagle Ford while carefully screening for accretive acquisitions that allow us to build future value.
Our investment levels have allowed us to both reduce leverage and meaningfully expand our cash return framework for investors, creating a winning recipe, especially on a per share basis. One that we believe is sustainable and will ultimately lead to a premium valuation.
That concludes our prepared remarks today. And we are happy to take your questions. Operator?
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Neal Dingmann with Truist. Please go ahead.
Neal Dingmann
Good morning, guys. And Darrin, thanks for the comments. My first question, I was just wondering if you could speak – I’m trying to more – maybe just for modeling, I’m trying to get a sense if you could speak to the obtained cadence of maybe some things of kind of how you’re looking at spending and maybe saying for production in D&C and C is as well to get a better idea of how we might want to shape that through the – into the end of the year.
Darrin Henke
Yes. Thank you, Neal. Be happy to address that. So we picked up the third spot rig in the second half of the second quarter and it’s drilling its last well currently. We’ll then complete those wells and get those online about the end of the third quarter. So you see an increase in capital relative to the first quarter and second quarter due to the third spot rig. Most of that capital being deployed in the third quarter, you’ll see the benefit of that capital in primarily in the fourth quarter and in 2023, as we bring those wells online.
And so you’ll see a nice increase in our guidance for the fourth quarter if you work through that math on production. And also in the fourth quarter, you’ll see our capital pull back more similar to the first half of the year versus the third quarter. Does that answer your question, Neal?
Neal Dingmann
Well, that does. And I’m just wondering, is it – I know you don’t have 2023 guide, I’m not looking for anything specific, is it that type of spend also as you get into 2023 or is it just still too early to determine that, kind of where you’re talking about that where the year end – you talked about in 4Q spending, maybe going down a little bit, so maybe for you, Rusty, I’m just wondering, I know, again, being cognizant of not having 2023 out there, anything we can think about that 4Q plan in the 2023.
Rusty Kelley
Yes. So as we’re thinking about 2023, as we said, we’re considering adding a third full-time rig to our two rig fleet, which will of course materially increase capital, but it also will grow our production materially. If we stay at kind of our two rig program, we’re going to have production growth in 2023, probably in the mid-to-high single digit range. But if we add a third rig and depends when we add it of course next year, but if we add it fairly early in the year, we’re going to be looking at double digit production growth annualized 2023 versus 2022 kind of the low-to-mid teens, would be what we would see there from a production growth standpoint.
So certainly excited about the opportunity to add a rig. It’s a lot more than just adding the rig. We got to look at all the services you, be it be it pipe, frac services, sand, et cetera. We got to make sure the entire supply chain is there and ready to support that third rig because we certainly want it to perform at similar levels as from an operational efficiency and execution standpoint as our two rigs that we have in our fleet today.
Neal Dingmann
Oh, great to hear on the production growth. And then lastly Darrin, sounds like out there, I’m hearing some, what I would call pretty exciting chatter in the market on the Austin Chalk, I’m curious as you could give maybe your view or plans specifically to your – on that play?
Darrin Henke
Yeah, there’s definitely some recent highlights in and around our legacy acreage in Gonzales and Lavaca counties. There’s been two recent completions wells by one by COP, one by EOG that have pretty exciting cumulative production rates at this point. There’s two rigs that have recently been brought in one by EOG and one by BP to drill offsetting our acreage to drill Austin Chalk Wells.
And we submitted a permit for an Austin chalk well just this week, we filed an application for a permit to drill a well perhaps late in the year or next year. So a lot of things going on in the Austin Chalk in and around our acreage. And as we’ve said before, we intend to really study what are the offset operators are doing. And when it makes sense from a risk adjusted returns basis we certainly have a lot of running room in the Austin chalk as well.
Neal Dingmann
Yeah. Great to hear about all that other activity. Thanks guys. Next quarter.
Darrin Henke
Thank you.
Operator
The next question is from Michael Furrow with Johnson Rice. Please go ahead.
Michael Furrow
Hi, good morning. Thanks for taking my question. So just a quick one in regards to these eight bolt-ons during the year. Are these smaller transactions being targeted, because there’s a lack of larger scale M&A opportunities in the basin or possibly some disconnection between buyers and sellers in the current market?
Darrin Henke
We’ve been successful. I think with the bolt-ons just when you look at the size and the fact they really create synergies for Ranger Oil that they may not for other operators due to how they fit in and around our existing position. And so these tactical opportunities there’s a number of them out there. We we’ve executed on eight already to-date and then they’ll likely will be more to come next quarter and beyond.
When you look at M&A across the broader Eagle Ford, there’s a lot of opportunities at all different sizes. And I think when you’re above a $100 million kind of a $100 million to $500 million range, there’s just a lot of competition from other entities, other parties that are working to – that are willing to pay up in an effort to create scale for their entities, for their companies. And we think that’s going to be a tough marketplace to compete in, but we absolutely be at the table and we’ll certainly be looking at those opportunities.
There’s also larger opportunities that are available where we think there’s less competition. And so we talk about a barbell approach, that being the tactical bolt-ons and then the larger transactions where we think Ranger will have the best odds of success of continuing on the M&A front.
Michael Furrow
Great. appreciate the color.
Darrin Henke
You bet. Michael. Thank you.
Operator
The next question is from Davis Petros with RBC. Please go ahead.
Davis Petros
Hey, good morning all thanks for taking my questions. The first one and maybe for you, Darrin, it’s just kind of how do you think about kind of free cash flow allocation going forward? It’s been nice to see all been active buyback program and kind of reloading that for mid-June mid next year, but how should we think about when you all are willing to step in to defend the stock and kind of keep that buyback pace versus using free cash flow for more of these tactical bolt-ons to enhance returns going forward?
Darrin Henke
Yeah, when we think about the allocation of free cash flow, we really see four buckets, four pillars that we focus on. It’s potentially paying down more debt. It’s additional organic investment. Return of cash to shareholders via the dividend or share repurchases. And then of course, additional accretive strategic acquisitions and with the free cash flow that we’re generating it’s not an either or it’s really both and.
We’re doing all of these things this year, all four of these we’re allocating free cash. And we see that we think that’ll be the opportunity in the future as well. So it’s our commitment to our shareholders on a risk adjusted basis. We will invest our dollars where there’s the most accretion than most value for our shareholders.
Davis Petros
Got it. Good to hear all good options. And kind of the second one talked about a little bit in your prepared remarks, but it’s nice to see you all been able to kind of keep managing inflation to keep it within that upper-end of the initial budget. But just kind of – if you can expand on maybe anything in specifically you all are doing on that front, what’s been keeping costs maybe better relative to peers? And then again, kind of as we look into 2023, recognizing you all don’t have guidance out there, but is there any kind of, any color you can provide on maybe how drilling along later post these recent acquisitions can maybe add some efficiency gains to next year’s program like this year’s where you can run at maybe a three rig pace and get a little bit more or a little less spending, I guess, for that amount of growth, if that makes sense?
Darrin Henke
Yeah. I’ve heard a couple questions in there. I’ll start digging into them and Julia might be able to help me out as well. So when you think about inflation and how we’ve managed it year-to-date, we’re drilling materially longer laterals this year than, than the last few years. And so that ultimately drives down the dollar per foot that we spend on our wells. We’ve also increased the pump rate on our frac drops, and that’s allowed us to lengthen out the stages, which reduces plugs, reduces the time on location, frac in the well. So that’s also another efficiency gain that that’s helped us mitigate inflation.
As we look forward in the second half of the year, we’re going to be transitioning from 5.5 inch long stream production pipe to 6 inch casing, that’s going to allow us to even pump higher rates on our frac jobs and lengthen the stages out even further. So again, providing additional efficiencies that will keep our costs in line for the second half of the year. The bolt-ons not only did we pick up additional working interest in existing wells. So, you’re really increasing your capital program without having to add rigs just by increasing your interest in the wells that you’re drilling.
We’re also increasing lateral lengths because that acreage, the wells that we have planned later this year will drill across from our legacy acreage onto the new acreage that we that we bought via the bolt-ons, so again, longer laterals, greater efficiency reduces the dollar per completed lateral foot. We intend to look at all those options plus many more. And when we think about 2023 in that program, it will – you’ll see increased lateral lengths probably again year-over-year going into next year.
Davis Petros
Got it. Good to hear. And kind of just one last to take onto that. Do you have any color on maybe what leading edge inflation is looking at kind of in rigs or services when you’re maybe considering looking at a third rig in the next year?
Darrin Henke
It’s tough to predict where inflation will go at with commodity prices where they’re at, we haven’t seen as much pressure, as much increases as of late than what we saw earlier in the year. So hopefully that’s a good sign for us that maybe inflation will stay where it is and it’ll be in check. But really too early to predict, but I can assure you, we’re staying on top of it. We’re testing the market for value is what we think about when we’re choosing service partners. It’s not necessarily the lowest cost provider, but the best overall value, looking at their efficiencies, their ability to execute our program and our plans, and what that will cost us. So we’re on top of it and too early to tell for sure, but I hope we’re starting to see some signs of abatement.
Davis Petros
Understood. Appreciate the time.
Darrin Henke
Yes, sir. Thank you, Davis.
Operator
[Operator Instructions] The next question is from Nicholas Pope with Seaport Research. Please go ahead
Nicholas Pope
Good morning, everyone. Kind of following up on those inflation comments. kind of curious on the operating costs side, kind of what the drivers are, seems like you’re seeing more on the LOE relative to the gathering process, which seems like it’s fairly flat with kind of the preview, I just kind of interested what the components are and where you think you are on the operating cost side of the installation profile?
Julia Gwaltney
Yeah. Thanks. Thanks for asking the question. That gives me a chance to really highlight our production team and the great work that they’re doing and identifying workovers. Where we were last year, we ran about one workover rig consistently in the field, and that jumped between doing capital work, running tubing, part of the drilling program, and staying on the workover expense side. In the second quarter, we added a second workover rig because we had so many projects identified. These are great projects on average payout in less than a month, get wells back online, lower the risk of us meeting our objectives and delivering on production as well as finding opportunities to slightly increase.
Continued to feed that pipeline of opportunities and just this week we added a third rig. So it’s an additional expense, but if projects pay out extremely quickly it’s a really good piece of business and hats off to our team for continuing to push it forward.
Nicholas Pope
I’m not sure if more activity is if I’d classify that as inflation, it sounds like I mean, as you look at that, it sounds like there is a lot more activity that you’re doing kind of production maintenance type work. Is that kind of where that wedge is on the LOE that seems to be having been added? Is that how I should interpret that?
Julia Gwaltney
Yes, it is a component of it. We’ll continue to look for opportunities to stabilize our base, flatten our base decline. There is a cost component to it as well. Fuel, everybody’s aware the fuel prices has gone up. It’s hard for us to complain much about that, but it is a component of our operating expense as well.
Nicholas Pope
Got it. I appreciate the comments. That’s all I had. Thank you.
Darrin Henke
Thanks, Nick.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Darrin Henke for any closing remarks
Darrin Henke
In conclusion. I, again, wish to thank all the Ranger, employees and contractors for their tireless efforts and relentless pursuit of excellence, which are directly contributing to 2022 shaping up to be another transformational year for our company. Between the strengthening balance sheet, debt reduction, the implementation of both a share repurchase program and dividend and the multitude of acquisitions already closed this year. Ranger is truly firing on all cylinders. We look forward to seeing many of you on our upcoming non-deal road shows. Thanks for joining the call today.
Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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