Chord Energy Corporation
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good morning. My name is Kate, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Fourth Quarter 2020 Earnings Release and Operations Update for Oasis Petroleum. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the call over to Michael Lou, Oasis Petroleum’s CFO, to begin the conference. Thank you. You may begin your conference.

[Michael Lou:]

Thank you, Kate. Good morning, everyone. We’re delighted to have you on our call today. I’m joined today by Doug Brooks, Taylor Reid, as well as other members of the team. Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners including the answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our earnings releases as well as in our filings with the Securities and Exchange Commission including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

[Doug Brooks:]

Thank you, Michael. Thank you, Kate. Thanks team for being here today. Good morning and thanks to everyone for joining the call today. I am Douglas Brooks. I’m the Board Chair and Chief Executive Officer to Oasis and we do sincerely appreciate your interest today. Before I start, I would like to, first of all, thank our first responders, healthcare providers, all the leaders that have worked around the world to assist in this COVID pandemic. We really appreciate all the work that’s been done and also to our teams and vendors for their work around the same reasons. Sincerely, thank you. So, I know many of you from a nearly 40 years in the industry and today is an exciting day to get to engage with you regarding Oasis. Over the last several months, I’ve taken the opportunity along with our team to solicit feedback and listen to the topics and ideas that each of you have suggested, and I want to let you know that the board has listened. The team has listened. And I think what we’ll talk about today through our major initiatives, we’ve ensured alignment with shareholders, including the most recently announced, which I consider industry-leading creative performance-based management compensation program. And we’ll talk about that in a few minutes. So, many of you know me that I’ve spent essentially my first 24 years with Marathon Oil Corporation through those years and several other public and private enterprises, I’ve been exposed to and worked successively within numerous business and commodity cycles. When I started in mid-November as Board Chair, we installed an incredibly talented and engaged series of board members. And as I look at the combination of board members, the team in place, I can tell you that I am fully committed as well as a team to the success of this company. However, as has been announced, we are under an active engaged search for a CEO replacement for me. And I’m happy to remain in this position as long as that takes. Quite frankly, from my perspective, having seen a number of things in my career, this is truly one of the most interesting and opportunity filled ventures that I’ve seen. The deeper that I, the Board and the team get into this the more excited we are about this incredibly strong organization with it’s really can do results oriented and truly, a value generating culture.

[Taylor Reid:]

Thanks, Doug. As you just heard, Oasis is in our strong position to succeed going forward. We’re happy to see improvements overall and the global health outlook, as well as economic indicators, the environment remains uncertain and we continue to prioritize the health and safety of our employees. The team has done a tremendous job adjusting to the remote work environment, brought on by COVID-19. And we have executed successfully while maintaining the safety of our employees. Our field operations have performed exceptionally well with our incident rates at or near record lows. Needless to say, 2020 was a truly extraordinary time for the world, our industry, and Oasis specifically. At Oasis, we took aggressive action on multiple fronts to put the company in the best possible position to succeed going forward.

[Michael Lou:]

Thanks, Taylor. impacts from the severe winter weather we experienced last week let us to postpone announcing our other the GAAP financials until March 8. When we expect to file our 10-K, this will keep my financial comments limited to the fourth quarter – limited on the fourth quarter and 2020, and we’ll focus on 2021. The Oasis operations team continues its relentless focus on cost control across the entire organization. 2020 CapEx was down over 60% from the original budget and 2021 is expected to remain at modest levels with a highly efficient program. Capital operating and overhead costs are down significantly from 2019 levels. Additionally, we have identified material savings beyond this progress, which will drive our margins higher and further increase free cash flow generation. I wanted to give a couple of quick thoughts on Dakota Access Pipeline. We’re obviously monitoring the situation and taking proactive measures to ensure access to market. For the second and third quarters of this year, Oasis is secured approximately one third of its oil volumes through a combination of forward sales and secured space on other pipelines out of the basin. in the event, DAPL were to shutdown, we believe it’d be an orderly shutdown and rail capacity would ramp up. North Dakota oil production is down approximately 400,000 barrels a day from its peaks of around 1.5 million barrels a day and the transport market can adapt as needed. regarding federal lands in matters related to recent governmental restrictions, we have no material impact there. We exited the year with $260 million drawn on our $575 million revolver. with cash and on hand of $15 million and $6.8 million of LCs, Oasis has had an estimated $323 million of liquidity as of year-end. At the beginning of the year, we made a commitment to investors across multiple fronts. You can see our progress on our strategic initiatives on page 5 of our investor presentation. in the near-term, we’re focused on self-help such as driving down costs, running it in efficient capital program with a low reinvestment rate and returning capital to shareholders. As far as our equity performance, we’ve had a strong run a year-to-date, but we continue to believe that we’re significantly undervalued versus peers, and dedicated to narrowing that disconnect through any channels available. We will be very proactive on the investor engagement front and continue to increase our sell-side coverage universe going forward. Additionally, liquidity has been improving and should continue to get better, and we continue to build – as we continue to build upon the momentum that we’ve seen so far this year. Additionally, we’re committed to improving the transparency of our business and specifically, getting recognition for our differential and valuable midstream assets. We’ve prioritized that in the near-term. In the meantime, we’ve provided guidance in our press release and on page 23 of our investor presentation, which shows the sources and uses of Oasis’ cash flow and the E&P business to the – the E&P business and the midstream business. It’s been a lot of hard work, but we are really uniquely positioned and offer a compelling opportunity for investors. Our efficient asset base supports a low re-investment rate and strong return of capital to shareholders. Our free cash flow yield is simply the best in the peer group. And I would argue our ability to maintain this level of free cash flow is very underappreciated. These advantages underpin a best-in-class balance sheet, which we can maintain while distributing a significant amount of capital. As Doug mentioned, Oasis is proud to have instituted its first quarterly dividend of $0.375 per share. We took proactive steps to work with our bank group to allow for earlier than expected shareholder distributions and that was important for us to provide to our shareholders. We wanted to set our initial fixed dividends at a level that was sustainable even at very low prices. And I should note that at $50 oil based on current guidance, we obviously have well in excess of a $100 million of additional free cash flow on top of the dividend. we will be thoughtful about the best use of this additional cash going forward. To sum things up, the environment is improving, that remains volatile and the Oasis continues to work diligently, to aggressively reduce our cost structure, improve returns, and return cash to our shareholders. With that, I’ll turn the call over to Kate for questions.

[Operator:]

Our first question comes from Derrick Whitfield of Stifel. please go ahead.

[Derrick Whitfield:]

Good morning, all and great update.

[Michael Lou:]

Thank you.

[Derrick Whitfield:]

Perhaps for Michael or Douglas, beginning with your final comments on free cash flow with your returns focused business model, how are you currently thinking about the allocation of incremental free cash flow above and beyond the fixed dividend?

[Doug Brooks:]

So, let me see start, and then I may turn it back over to Michael. but so as the board was installed just last fall, we’ve looked at all of those options. We really felt that to put in place a fixed dividend that had a material return was step one. We do see as pointed out, we have material additional free cash flows. Those can come in the form of share repurchases, the installment of perhaps a variable dividend, but I can tell you that the board is looking at all those options. And I think as we continue to run the business model through in the near-term, there’ll be more visibility on that. But thank you for noticing, I think it’s an attribute that’s unique to us, compared to peers.

[Derrick Whitfield:]

And as my follow-up, you provided a 2022 outlay noting flat to slightly higher volumes on similar CapEx, those metrics are materially better than what was offered in your cleansing materials. Could you comment on where you’re seeing the greatest gains in capital efficiency and/or asset productivity?

[Taylor Reid:]

Yes. I’ll start out, Derrick. One of the things is, put this capital allocation community together to really focus on investment and returns and as we looked at the asset base in inventory, we’ve made some big strides in terms of continuing to maximize the capital efficiency. So, a combination of driving costs down and then really spacing our wells widely, so that we’re going to get the maximum returns, the inventory slides, I think on here, a good one to look at, you look on page 13 and Page 14, and then maybe, just in the Bakken alone, you see we’ve got a 10-year run rate – runway of these highly capital efficient projects that they work between 30 and 45 WTI to 15% return and that’s loaded. And in the majority of those were below the $40 markers. So, that’s a big piece of it relative to – I think what was probably a big conservative, what you’d see previously in the cleansing materials.

[Derrick Whitfield:]

Great. That’s very helpful, guys.

[Doug Brooks:]

Derrick, I would point out on the term loaded we use here, Derrick is loaded with G&A, and I think, am I correct here, Taylor, that was loaded at 250 barrel.

[Taylor Reid:]

Correct.

[Doug Brooks:]

And I think we’re showing on one of our slides that that’s far above our current run rate. So, there’s additional margin in that.

[Derrick Whitfield:]

Thanks, Douglas. Great update, guys.

[Michael Lou:]

Thanks, Derrick.

[Operator:]

Hello, Phillips. Is your phone on mute? We’re not able to hear you.

[Phillips Johnston:]

Hello. Can you hear me now?

[Operator:]

Okay. Yes. Okay. We can. Thanks.

[Phillips Johnston:]

Okay. Sorry about that. I didn’t hear my name called. Thanks, guys. Just congrats on the dividend announcement and working with the banks just to allow that to happen earlier than expected. I guess just to follow up on the topic of what to do with the additional free cash flow obviously, it’s still early. But is your sense that the board would rather steadily grow that base dividend over time? Or do you think there’s really a serious appetite just to maybe sort of keep that fixed dividend constant and maybe, move more towards a – more of a fixed plus variable dividend policy like we’re starting to see from some of the larger names in the space.

[Doug Brooks:]

Well, let me add a third element and that Phillips. So, I’d direct you to, I think slide 11 in the deck. A couple of things as you allocate capital, not only just opportunities and field, but allocating capital back to investors. We’ve talked about the several there, I point out on slide 11 that I think we’re trading at a very compelling valuation and I’m not over-signaling or under-singling anything. but I think share repurchases or value accretive today for us. I think the option to slowly increase the dividend as you suggested as it being fixed as an option. And then certainly, I think there’s a component of the variable option on dividends, because of the nature of our business. We have a revenue stream that could increase significantly with commodity prices and we want to retain that option as that develops. And so Michael, anything you’d further like to amplify, but I’d say essentially Phillip, we’re looking at those options to be decided.

[Phillips Johnston:]

Okay. Are there any noticeable drawbacks or flaws in a variable dividend structure that would maybe, prevent you guys from moving in that direction?

[Michael Lou:]

So Phillips, just thinking through that, we were able to get amendment with our banks to be able to provide this fixed dividend for the next couple of quarters. We do have a limiter in our bank agreement for substantially more than that before 9/30. But after that, it’s open to free cash flow. So, we do have a little bit of time to think about how we want to best return capital to our shareholders. And as Doug mentioned, we’ll look at a number of things. A great thing for us is that we’ve got an incredible amount of free cash flow generation this year. We think that only continues to progress as oil prices are – have been strong. We think that will potentially continue to grow if we think that free cash flow yield is highly durable that, that allows us to do a number of different things and we’ll look forward to kind of the best way to return to shareholders.

[Phillips Johnston:]

That was good, Michael. thank you.

[Michael Lou:]

Thank you, Phillips.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Brooks for closing remarks.

[Doug Brooks:]

Thank you, Kate, and thanks for all the participation today. So look, you heard me emphasize that the underlying strength away. So, should the board, our leadership team, our Oasis team, our member banks, our investors, our communities, and our stakeholders. And it is up to us to unlock that real value of these assets. The board has been strongly engaged and we’re very eager to deliver for these – on these results. You will see that we will continue to engage in the energy transition currently underway. And as we demonstrated today, we think we found our place in that transition, because we need to – energy suppliers today facilitate medicines, comfort products, food, transportation, clothing, and so many other things that benefit the people of our world. We’re uniquely positioned with a best-in-class balance sheet, a quality and sustainable long lived asset base and a new rigorous capital discipline, and those will translate into long-term value creation for all of us. We look forward to delivering on those promises. So with that, I again, thank you for all your time and diligence, and patience with us over the last couple of months. And that will conclude our call.

[Operator:]

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