ROCC (2021 - Q4)

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0:03 Good morning and welcome to the Ranger Oil Corporation Fourth Quarter and Full Year 2021 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. 0:38 I would now like to turn the conference over to Ranger Oil. Please go ahead.

0:42 Thank you and good morning, everyone. I'm Clay Jeansonne, Director of Investor Relations for Ranger Oil Corporation and we are pleased today to discuss our fourth quarter and full year 2021 operational and financial results as well as recent accomplishments. With me today Darrin Henke, our President, Chief Executive Officer and Director. Also joining us and available for our Q&A session are Russ T. Kelley, our Senior Vice President, Chief Financial Officer & Treasurer and Julia Gwaltney, our Senior Vice President and Chief Operating Officer. 1:19 Before we begin, I would note that today we will discuss certain non-GAAP measures. Definitions and reconciliation of these measures to the most comparable GAAP measure are provided in the company’s fourth quarter and full year earnings presentation and press release that can be found at www.rangeroil.com. 1:39 Our comments today will also contained forward-looking statements within the meaning of the Federal Securities Law. These statements are subject to a number of risks and uncertainties that could cause actual results to materially different from those forward-looking statements, including those identified in the Risk Factors of the company's annual report on Form 10-K. 1:59 So with that, I will hand it over to Darrin to discuss our results and recent events. Darrin?

2:06 Thank you, Clay. We appreciate everyone joining us today. During the call, my comments will generally follow our earnings presentation that we posted on our website late yesterday. 2021 was a transformational year for the company, and I want to thank the entire Ranger employee team for their continued hard work and dedication. Their collective efforts allowed us to execute a number of strategic initiatives and transactions that further reinforced Ranger's position as an industry-leading operator, squarely focused on capital discipline and continuous improvement to drive top-tier cash-on-cash returns, further strengthening our financial position. 2:52 Turning to Page 4. Our company looks very different today relative to the beginning of 2021. Complemented by the closing of our highly accretive Lonestar and Rocky Creek acquisitions, we ended 2021 with a footprint of more than 140,000 net acres in the core of the Eagle Ford Shale that produced more than 40,000 barrels of oil equivalent per day during the fourth quarter. This vast acreage position provides Ranger with an estimated 20 years of high-quality drilling inventory, 14 years of that inventory projected to be profitable even at $50 per barrel WTI pricing. 3:37 Our total proved reserves at year-end equaled 241 million barrels of oil equivalent, with oil accounting for 68% of those reserves. 92 million barrels of our reserves are considered proved developed. Looking at the estimated value of those total proven reserves, we have a PV-10 value of $4.7 billion, using $80 for oil and $4 for gas. Given that our enterprise value is approximately $2.2 billion, I believe our current equity represents a rather compelling value opportunity. 4:19 We had many significant operational and financial accomplishments in 2021 as evident on Slide 5 of the presentation. The initiation of our in-basin consolidation strategy resulted in the acquisition of Lonestar Resources, which we purchased at a discount to PDP in a much lower price environment. As mentioned, this contributed to expanding our estimated drilling inventory to approximately 20 years, assuming 50 wells drilled per year. 4:50 In addition, our acquired acreage and the ongoing success of our targeted capital spending and operational improvement programs contributed to growth in total proved and proved developed reserves of 90% and 82%, respectively. Using $80 flat pricing, a PV-10 calculation of our proved developed reserves, net of debt, yields approximately $39 per share; and the PV-10 of total proved reserves, net of debt, was estimated at $94 per share. 5:28 Our success on the development and operational fronts helped drive performance in 2021, resulting in the top adjusted EBITDAX margin as compared to all other U.S. independents, contributing almost $110 million of free cash flow for 2021. As important, our leading position allowed us to materially transform our balance sheet by accessing the unsecured debt markets to term out and refinance the majority of our debt. We also reduced our debt under the revolver by more than $100 million in 2021. Further, we simultaneously enhanced our liquidity position via 90% increase in our borrowing base, which is currently $725 million, with less than $150 million drawn net of cash 6:21 Drilling, completion and field operational efficiencies also contributed to our outperformance. On Slide 6, we list some of the highlights from 2021, including drilling efficiencies that resulted in the quickest rig move, the fastest mile drilled, the most vertical feet drilled in a day and the fastest 2-string and 3-string wells drilled in our central area, spud to total depth. We increased our average footage drilled per day by 19% as compared to 2020. 6:55 We also saw significant efficiencies on the completion side, including testing modified designs that utilize an increased casing diameter and higher injection rates, a design we will transition to for future wells. We were also achieving a record 8.4 frac stages per day and completing our longest lateral to date of 11,756 feet. The collective results of these efforts resulted in an average completion cadence of 7.2 frac stages per day, a 20% improvement versus 2020. 7:34 Complementing the improvement seen in our drilling and completion activities, Slide 7 conveys how we also continue to drive down our field operating costs, where we are clearly seeing the cost synergies afforded by our consolidation efforts. We continue to prudently invest in proven technologies to drive further cost efficiencies such as jet pump installations, annular gas lift, ongoing field compression upgrades and other production management initiatives designed to bend the curve and decrease the natural decline rate of our wells. 8:10 Referencing Page 8, our relentless pursuit of further efficiencies in our operations has resulted in our ability to consistently report the highest adjusted EBITDAX margin of any publicly traded independent in the United States. Contributing to our results is our differentiated acreage position in the core of the Eagle Ford that provides a high oil cut and the ability to receive premium MEH pricing, given our close proximity to key Gulf Coast markets. 8:42 Slide 9 summarizes why we view the Ranger as an extremely compelling investment opportunity, the combination of our industry-leading margins, multi-decade drilling inventory and efficient capital development program provides us with significant runway to drive further strength in our balance sheet and the ability to use our expected significant free cash flow generation to provide increased value for our shareholders. 9:10 In 2021, our capital program developed 19.9 million barrels of proved reserves and an attractive cost of only $12.27 per barrel of oil equivalent. Given the capital we spent on drilling those wells compared to the cash flow they generated in 2021 and the estimated cash flow from the future, we calculate an implied CapEx return on investment ratio of approximately 3.7x at $70 flat oil price. 9:40 Given our proven operational and financial success and the outlook for ongoing substantial free cash flow generation, we expect to hit our 1x leverage target in the first quarter of 2022, ahead of schedule. At current commodity prices, we expect to generate over $250 million in free cash flow. We plan to deploy that free cash flow in several ways. First, we plan to authorize $100 million share repurchase plan in the second quarter. Then we expect to continue deleveraging the balance sheet providing the ability to pursue potential consolidation opportunities. 10:19 Finally, we intend to initiate a fixed dividend of $0.25 per share annualized, beginning in the third quarter. We believe these planned uses of excess cash flow provide investors with a highly compelling investment opportunity. 10:37 On Slide 10, we provide illustrative potential asset value based on SEC pricing as of December 31, 2021, and a flat price deck of $80 per barrel and $4 per Mcf. Our current enterprise value of roughly $2.2 billion represents an approximate 35% discount to our total proved SEC PV-10 value based on SEC pricing. Using a flat price deck of $80 per barrel and $4 per Mcf, our market value is trading at an approximate 50% discount to the total proved PV-10 of approximately $4.7 billion. 11:20 The value potential increases even further when you consider additional probable and possible reserves shown here at PV-20. We have considerable value potential particularly relative to our current share price. It is important to note that these estimates do not include additional locations and other benches and formations, including more than 200 estimated locations in the Upper Eagle Ford and Austin Chalk that are in close proximity to industry activity. 11:53 Turning to Slide 11. As I mentioned previously, we currently have approximately 20 years of estimated drilling inventory, roughly 975 identified locations. We believe we have 10 years of inventory with each and every well generating an estimated well level internal rate of return greater than 100% at $80 per barrel flat pricing. And should commodity prices pull back, 70% of our inventory has an estimated breakeven at $50 per barrel or lower. We also display on this slide the third-party reserve engineer-type curves for our drilling plan for the next two years. We expect the wells in this program to also generate greater than 100% well-level rates of return, assuming an approximate $9 million of capital investment per well. We believe the quality and depth of our inventory competes very favorably with other E&P companies. 12:57 Looking at Slide 12, we're also seeing overall 15% outperformance from the wells we drilled in 2021 compared to our type curves. Drilling and completion improvements and ongoing operating efficiencies demonstrate an approximate 10% increase in EURs per foot since 2019. 13:21 On Slide 13, we show three high-potential inventory-rich areas for Ranger. These consolidated positions allow for longer laterals with multi-well pads and shared facilities, which we believe will generate higher returns. Recent wells in these areas exhibit peak 30-day initial productivity rates over 1,000 barrels of oil per day with a 90-day average IP rate equally impressive, ranging from 750 to 900 barrels of oil per day. Combined, we have almost 250 future drilling locations in these three areas. 13:59 Turning to Slide 14. We provide the details surrounding our low leverage and robust current liquidity profile. Supported by our targeted acquisition, development and operational efforts, over the past three years, we have seen a dramatic increase in our generation of free cash flow. We expect this to meaningfully accelerate in 2022. Combined with a debt maturity schedule that does not require repayment until more than three years out, we are very comfortable with our plan to begin returning meaningful levels of capital to our shareholders. Our continued success in 2021 as exemplified by our strong production and margins, combined with our robust inventory of high rate of return drilling inventory, supports our outlook of generating over $250 million of free cash flow in 2022. We will continue to allocate our free cash flow based on the most attractive risk-adjusted opportunities. 15:01 As shown on Slide 15, our investment strategy is multifaceted, including measured organic capital expenditures, further enhancing our financial position through continued deleveraging, returning capital to our shareholders through a fixed quarterly dividend and opportunistic share repurchase program and continued pursuit of accretive transactions that expand our operational footprint in the Eagle Ford. Our return of shareholder capital is targeted to begin following our achievement of a leverage ratio of less than 1x, which we expect at the end of the first quarter. We plan to begin the company's first ongoing, quarterly cash dividend program in the third quarter, targeting a quarterly dividend payout of $0.0625 per share or $0.25 per share annually. We also plan to return capital to our shareholders through a share repurchase program of $100 million or approximately 6% based of market cap to opportunistically repurchase shares in the open market. 16:12 Finally, we will continue evaluating opportunities to expand our market position through targeted acquisitions. Of course, and as in the past, our strategy continues to remain squarely focused on long-term shareholder accretion, rigorous capital discipline, balance sheet strength, robust cash-on-cash returns and operating in an environmentally and socially responsible manner. On that last point, I am pleased to report that we look forward to releasing a comprehensive sustainability report in the second half of this year. We view protection of the environment as one of our top priorities and continue to advance our operating initiatives on multiple fronts, inclusive of minimizing flaring, reducing emissions and the potential for oil spills by transporting a significant portion of our production via pipeline as well as conducting daily well inspections. We also will utilize multipad and longer laterals to reduce our environmental footprint. 17:18 We also promote a work culture that treats all employees fairly and with respect, promotes inclusivity and provides equal opportunities for professional growth and advancement, all based on merit. As a result of this culture, four of the six members of our executive team are women, including Julia Gwaltney, who was recently promoted to Chief Operating Officer. 17:43 Turning to Page 20. When we first announced Lonestar acquisition, we projected over $20 million in annual synergies. I'm pleased to report we now estimate the synergies will actually be closer to $25 million per year over the next five years. We have already high-graded operations, increasing the combined companies per well lateral length, restructuring a number of Lonestar's marketing and midstream contracts and consolidating much of the operations of the two companies. 18:16 In conclusion, I could not be prouder of what the Ranger team has accomplished. Their continued hard work and dedication have resulted in a differentiated Eagle Ford-focused exploration and production company, uniquely positioned for long-term success. I truly appreciate their efforts and look forward to working closely with them to take the company to new heights. 18:37 So with that, we will open up the call to questions. Operator?

18:42 We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Scott Hanold with RBC Capital Markets. Please go ahead.

19:16 Thanks and good morning all. Just a question on Page 15. Obviously, you pretty well defined what your strategy is. And you also previously talked about, in this presentation, the value disconnect that's in Ranger's stock. And as you step back and you think about like all the different levers and knobs you guys can pull in turn, like what do you think is going to have -- what is your target to do? What is the targeted thing you're going to look to do to basically bridge that valuation gap? What do you think is going to have the most influence on it? Is it just executing and driving free cash flow? Or do you think like something like a stock buyback potentially could be a bigger opportunity for you to bridge that gap?

20:04 It's a great question. Scott, I think it's really in all of the above that we're showing here on Slide 15. The marketplace, the voice, is changing daily, all around us looking at commodity prices and a lot of change is going on in the world right now. And I think being flexible and pivoting to which one of these makes the most sense at the time when we have the free cash flow, that's the way we're going to look at things. We would love to see an increase in scale. Scale is relevant. We'd like to see more consolidation. But we have, with these other initiatives, shareholder-friendly initiatives that we've initiated between the dividend and share buybacks, we have other options for investment over and above our capital program, over and above consolidation. So really an all of the above strategy.

20:58 Okay. And then my follow-up question is, obviously, on the A&D market and M&A market, you guys have been very proactive. And can you talk about what you're seeing in the market and how that plays into some of the uses of cash options like stock buybacks. So would you guys -- is the bar a little bit higher on deals for you guys now that you plan to have a buyback authorization in place?

21:25 I don't think the share buyback authorization changes the way we're looking at acquisition opportunities or consolidation opportunities. We're going to stay to -- use the same disciplined approach looking for accretive acquisition opportunities with the commodity price around -- the price to do consolidation certainly is changing daily, and we have great options. We look at just about everything in the Eagle Ford that comes available. We're not going to win them all, and that's okay. We're going to do the smart accretive deals and we're going to look at those opportunities relative to the intrinsic value of our company and our asset base, and does it make sense to do the consolidation or does it make sense to repurchase shares.

22:11 Got it? And then – and could you just give us a color on that -- the M&A market right now what you're -- what you're seeing?

22:17 We -- there's definitely deals in the marketplace and we're active. And I really can't say much more, I think outside of, there'll be transactions occurring and hopefully we're part of that. But we'll see.

22:32 Thank you.

22:34 The next question is from Neal Dingmann with Truist. Please go ahead.

22:38 Good morning. Rusty, could you or Darrin -- you guys talked a lot about there's a lot of potential efficiencies. So I'm just wondering, could you talk about in the guidance sort of things that you're seeing for the remainder of the year? How much of that are you already factoring in?

22:53 Are you talking about drilling and completion or operational efficiencies or?

22:59 Yes. Exactly right. No, exactly right. Given what I think you're going to have by the longer laterals, these pads, Darrin, you guys -- you outlined a nice laundry list. I think you're going to actually have more than others. And I'm just wondering with that, are you and Rusty already including that in kind of what you're thinking about with the free cash flow guide for the year? If you are, can you just kind of talk about some of the things that's incorporated in that guide?

23:27 Yes. So we're certainly -- what we're really proud of this year relative to development is, we're transitioning to materially longer laterals and over 30% longer laterals on average this year versus last year. And in fact, in the first quarter of some wells that we finished drilling them around the end of the year then completed them here in the first quarter, they're actually average lateral length of 12,800 feet with one of them is over 14,000 feet. So we've shown already this year that we can execute on these very long laterals. And we can get them fracked, drilled, plunge drilled out and we're just turning those wells online as we speak. When you switch and transition to those longer lateral program, it takes some time to get those first few pads drilled out, of course, and then the completion timing is quite a bit longer when you're increasing the lateral length by 50%. So you've seen a little lull in our turn-in lines here in the first quarter, and that's impacted the first quarter production a tad, but you'll see the production ramping up later in the year. And we've built all that into our guide.

24:37 Okay. And then could you talk a little bit about -- I know we've talked last time a little bit about this, that third rig. Can you talk about if prices start to continue to escalate, I mean can you just talk about plans around that, how flexible that is? Just give us some thought. I really like the upside potential that, that could bring, especially with the free cash flow you guys are bringing. So could you just talk about sort of the optionality around that there?

25:01 You bet. You bet. I'll take the opportunity to talk about why bringing the third rig, and we hadn't talked about that previously. And via the Lonestar acquisition, we picked up some really high-quality acreage down in LaSalle County. It's quite a ways away from where our rigs are currently executing our plan to date. And so rather than move a rig all the way down there, what makes sense to us is to pick up a spot rig, that's a hot rig that's active in the area. And we're seeing opportunities to do that. It's not the easiest thing today to pick up a drilling rig, but we do think we'll be able to execute on that and drill some wells in the horned frog area. And they're going to be very high quality in the top decile of our inventory from a return standpoint, so very high-quality acreage and drilling opportunities. 25:47 So the way we've modeled that is that rig being picked up sort of middle of the year, and you don't see a lot of production improvements this year or production gains this year. But Neal, it's all about cash-on-cash returns, and we don't get too fussed with the calendar or the quarter as we look at what's the right cash-on-cash investment decision, and that's what we'll do. That's why we continue to execute our completion program late in the fourth quarter. And we were able to save over $1 million by executing that plan late in the year versus shifting it into early this year. Anyway, it's all about cash-on-cash returns. I hope I answered your original question in there.

26:29 No, no, no, you did, and I just hope the market keep seeing that. I think your cash and cash returns phenomenal. So hoping the market starts to recognize that. Thanks, guys.

26:36 Thank you.

26:39 [Operator Instructions] The next question is from Charles Meade with Johnson Rice. Please go ahead.

26:48 Good morning, Darrin, you and the whole team there. A couple of things -- a couple of discrete ones for me, in your -- on the third rig, with respect to the CapEx guide that you gave us? How many -- how many wells or what duration of -- of a contract do you have for that -- for a third rig that's implicit in that guide?

27:14 Yes. So I want to be clear, we don't have that rig under contract at this point. We're certainly talking with our industry peers and working to get that rig under contract. It's a handful of wells is kind of how we're thinking about it, but we haven't landed on how many wells. It really depends upon what kind of window you can get on that rig. If we're borrowing a rig from one of our industry peers, they may allow us to drill two wells, four wells and they may allow us to drill more. So we haven't been real specific or haven't given out any specific guidance to how many wells we'll drill there. It really depends on what we can find in the marketplace relative to a hot rig.

27:53 Right, that makes sense. And so -- but as far as what's in -- what's your CapEx guy, we should think, three to five or something like that?

28:01 Yes, sir.

28:02 Okay. Great. And then going back to -- on the share buybacks, you mentioned that you're going to be opportunistic with the share buybacks. Can you talk about what your criteria maybe, whether it be the criteria for where your balance sheet or where your cash balance needs to be or versus or maybe your criteria on what you need to see as far as your share price relative to your view of your asset value?

28:35 Sure. The first -- taking that into a couple of parts, what our balance sheet looks like. We've talked about this is connected to us hitting our goal of 1x, which we expect to hit earlier than originally anticipated. We told the market sometime in the first -- before the end of the first half, we now anticipate that, that will likely be by the end of the first quarter. And so that's really the catalyst to us beginning our free cash flow strategy and returning capital to shareholders. With regard to how we're going to judge that, we talked in the presentation about looking at being opportunistic relative to intrinsic value. The way we look at that may depend on a lot of market factors. But certainly, to the extent that it's below PDP value in a way that we can lock that in, certainly qualifies for that. But obviously, we believe that we're going to see significant value creation as we go forward in this environment. And so we're going to be looking at it a few different ways, but certainly looking across the spectrum on Slide 15 of our different options for that free cash flow, we're going to be making a decision of what is the best use of that free cash flow, both strategically and accretively for shareholders.

29:56 Got it. That's helpful, roughly, particularly, when you look at -- what the chances of getting a PDP deal in the A&D market right now versus your own valuation, that's helpful insight and thank you for that.

30:12 This concludes our question and answer session. I would like to turn the conference back over to Darrin Henke for any closing remarks.

30:18 Yeah, really appreciate everyone calling in today and listening to the call. When you look at Ranger Oil Corporation, we've got the number one EBITDAX margin of all US Independents last year was rather transformative. We doubled our inventory now have two decades at our current pace of development and future high quality of drilling inventory. We executed a very capital efficient program last year, as I mentioned delivering 3.75x CapEx return on investment. We got a strong balance sheet approaching 1x with tremendous free cash flow optionality and we're initiating shareholder friendly strategies. Add all those things up. It's a very compelling value opportunity. Thanks for calling in today. Take care.

31:07 The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.