Callon Petroleum Company (NYSE:CPE) Q3 2023 Earnings Call Transcript
Callon Petroleum Company (NYSE:CPE) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Callon Petroleum’s Third Quarter Earnings Conference Call. [Operator Instructions] Just as a reminder, today’s conference call is being recorded. [Operator Instructions] I would now like to turn the call over to Callon’s CFO, Kevin Haggard. Please go ahead, sir.
Kevin Haggard: Thanks, operator, and good morning, everyone. Apologies. We had a little hiccup with the link to the webcast. I think we’re now all in, and there will be a recording afterwards. So we appreciate your interest in Callon. With me today are our CEO, Joe Gatto; and our COO, Russell Parker. We will happily take your questions at the end of our prepared remarks. We will reference our third quarter earnings release and supplemental slides, which are available on our website under the Investors tab. Today’s call will also include forward-looking statements that refer to estimates and plans. Actual results could differ materially due to risk factors noted in our presentation and SEC filings. We will also refer to some non-GAAP financial measures, which we believe help facilitate comparisons across periods and with our peers.
For any non-GAAP measures referenced, we provide a reconciliation to the nearest corresponding GAAP measure in the appendix to our slide deck and our earnings press release, both of which are available on our website. With that, I will now turn the call over to Joe.
Joe Gatto: Thank you, Kevin. Good morning, everyone. Cowen posted solid results for the third quarter, marking our 14th consecutive quarter of adjusted free cash flow generation, cash flow that we are using to reduce debt and repurchase our shares. Our corporate priorities are clear. We are focused on maximizing free cash flow, aggressively driving down our cost structure, reducing absolute debt and returning cash to owners through our share buyback program. I’ll divide today’s call into 3 segments. First, I’ll summarize third quarter financial and operating results. Overall, it was a good quarter with total production and key operating costs in line with expectations and capital investments below guidance. However, we did experience some headwinds related to our near-term oil production, which I will address shortly.
Second, I’ll cover our unrelenting focus on safely driving cost out of the system and creating sustainable operational efficiencies. Our focus on financial and operational cost controls is producing impressive gains, and we’ll pay increasing dividends into 2024 in terms of both free cash flow generation and lower breakeven prices for our Permian inventory. Next, I want to spend a bit of time on the sustainable benefits of our life of field co-development model. This is an ongoing and proven development process that maximizes the long-term value of inventory, where real-time learnings are then applied to future capital investments. We continue to see well productivity at Callon as moving counter to industry trends. However, we recognize that we need to continue to optimize that model over time with new information in order to properly balance near-term returns with longer-term opportunities.
Lastly, I will conclude with some early thoughts on 2024. Our recent efficiency gains in both drilling and completions are expected to be sustainable and will allow us to maximize value in 2024 through the enhancement of 2 key financial metrics, capital efficiency and free cash flow conversion of EBITDA. Let’s get started with third quarter results. For the third quarter, total production averaged 102,000 BOE per day. Oil sales averaged about 58,000 barrels per day. The shortfall in oil volumes is related to 2 key factors: first, the extreme temperatures and related power and midstream issues we experienced in July, which we discussed on the Q2 call, continued into August and September in the Delaware Basin, especially in our oil areas like Delaware East.
Power outages impacted our electrical submersible pump program and reduced expected order volumes due to downtime days as well as the time to ramp the ESPs back to normal operating levels. The second factor is related to oil production from recent multi-zone projects in the Delaware West, our most gas-weighted area. About 1/2 of our third quarter turn in lines or 15 of the 33 were in Delaware West. While total production on a BOE basis from recent completions was relatively in line with expectations, gas-to-oil ratios were much higher than expected. The commodity mix from these wells will also have an impact on our fourth quarter oil volumes. As an additional note, we recently accelerated a change in our Delaware Basin artificial lift program that was previously slated to start in 2024 to improve uptime performance.
This program will incorporate an increasing proportion of gas lift installs relative to ESPs over time to reduce production downtime from power and weather events, lower workover expense and enhanced longer-term resource recovery. In the fourth quarter, we do see some negative impact to production as compression-related equipment is procured and installed in areas where nearby gas lift installations don’t fully exist. With the program up and running this quarter and firmly incorporated into our planning process, we don’t expect to see this timing issue going forward. Overall, we expect fourth quarter oil production in the range of 56,000 to 59,000 barrels per day, with total production in the range of 100 to 103 BOE per day, comprised of approximately 79% liquids.
As part of our fourth quarter activity, we expect to turn 14 gross wells in line in the fourth quarter in our oilier areas, the Delaware East and Midland Basin, which will benefit our 2024 mix. Our forecasted capital investments for both full year and fourth quarter 2023 remain unchanged, despite an increase in drilling and completion activity driven by improving cycle times that I will hit upon in a minute. This clearly demonstrates the cost efficiencies we are realizing today. The corollary to the cost and capital efficiencies we are experiencing is that we are improving our rate of conversion of EBITDAX to adjusted free cash flow. In today’s deck, we show how this conversion has increased throughout the year. A few additional points to highlight.
G&A costs are now lower as a result of focusing the business solely on the Permian and streamlining our organizational structure. We are creating sustainable efficiencies across the business that will lead to improved results in future periods. We generated nearly $50 million in adjusted free cash flow this quarter. This gave us the flexibility to kick off our share repurchase program and opportunistically increase working interest in upcoming projects through several land initiatives. We are laser-focused on reducing absolute debt and strengthening our capital structure. At quarter end, total long-term debt was approximately $1.9 billion, down more than $300 million from the period -- prior period. Our outlook for higher free cash flows in the fourth quarter will allow us to keep on pace with reducing debt and buying back additional stock through year-end.
We have benefited from recent acquisitions and are now a Permian-focused oil and gas company with scale. We added quality assets in the Permian and extended our runway of high-return long-lateral development locations. In terms of our recent Delaware acquisition, our first 5-well project is currently coming online, and we are encouraged by early time oil production rates and wellhead pressures. We will keep you updated on progress here. We have materially strengthened our balance sheet and implemented a cash return program for shareholders. We plan to use up to 40% of our adjusted free cash flow to repurchase shares in the fourth quarter. While we are focused on reducing absolute debt, we see buying back our shares at today’s valuation as a very attractive use of cash flow.
We have strengthened our leadership team and redesigned our operating teams. Our new COO, Russell Parker, is leaving no stone unturned as he assesses our business and benchmark our performance against industry. He is making an impact, applying has years of experience to safely enhance operational practices, lower costs and create sustainable synergies to drive future performance. I know it is eager to share some additional highlights and talk about his team some more during our Q&A. But as a start, early operational wins include: one, we are materially reducing days versus depth through the elimination of casing strings, which decreases cycle times and enhances project returns. Each of our developments going forward will have a fit-for-purpose casing design, tailored to maximize value.
We’ve provided a couple of examples of this on Page 7 of the presentation materials. Reductions in cost per lateral foot are being realized through the optimization of drill bits and the ability to drill long laterals. On the completion side, we’ve increased completed lateral feet per day by as much as 20%, and we’re seeing repeatable efficiencies and pumping rates and hours pumped per day. The combined impact of these realized improvements are driving overall performance into year-end. We now anticipate to complete approximately 50,000 more lateral feet and commenced drilling an incremental 5 wells relative to our midyear forecast. This additional activity will benefit 2024 production, all while staying within our existing budget. These accomplishments have been realized in a very short period of time after we’ve revamped our operations in recent months.
This has demanded a tremendous amount of effort, and I want to thank the entire organization for making this possible. Let me shift gears and discuss our life of field co-development model. This thoughtful approach to development has been constantly evolving over the past 5 years. It differentiates us from our peers and our well productivity is performing counter to industry. We have learned a great deal about interactions between our codeveloped zones and associated well spacing and placement. This continuous learning provides the foundation for ongoing tailoring of projects to maximize returns. For example, our recent co-development in our Delaware South area demonstrated that our deepest target zone could be developed separately over time, allowing us to reduce overall project sizes and cycle times as well as reduced facility investments.
This continuous improvement is critical to maximizing our NPV proposition. Let me wrap up today’s call by providing some of our early thoughts around 2024. Consistent with prior practice, look for formal guidance from us early next year. First, we will continue to focus on maximizing free cash flow. Our top cash flow priorities are to fund our high-value developments, reduce debt and repurchase shares. We believe that allocating capital appropriately across these buckets will drive improvements in our cost of capital. We will continue to be very disciplined with our capital investments. With recent efficiency gains in drilling, completion and facilities, we expect to do more with less in 2024 and forecast average DC&F cost per well to be down over 15% versus 2023.
In addition, ongoing high-grading of investments within our co-development model will allow us to target lower investment rates to enhance free cash flow. Our production trajectory in ‘24 will benefit from pulling forward more drilling and completion activity than initially planned as we are improving cycle times in the second half of this year as well as the return of a second completion crew early in the next year. In terms of our early thoughts on 2024 production outlook, increases in activity to drive top line growth will be secondary to drive an improved capital efficiency, as we prioritize debt reduction and share repurchases. I’ll also point out that we expect our oil mix to improve over the coming quarters as we focus on high-return oil areas in the Delaware and Midland Basins.
We will remain nimble as our 2024 program progresses, and we’ll evaluate increases in our activity to the extent we achieve DC&F reductions in excess of our original plan, similar to what we’ve done in the second half of this year. We appreciate your investment in our company, and we look forward to taking your questions. Operator?
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