Coterra Energy - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered strong operations: oil and gas production beat guidance ranges, capex came in below midpoint, GAAP EPS was $0.68 and adjusted EPS was $0.80; management reduced 2025 capex by ~$100M and tightened 2025 production ranges.
• Versus S&P Global consensus, adjusted EPS modestly beat ($0.80 vs $0.796*), while revenue and EBITDA (Adj. EBITDAX proxy) were below ($1.904B vs $2.029B*; $1.337B vs $1.383B*)—derivative losses (-$112M) depressed reported operating revenues and EBITDA-like metrics. Values retrieved from S&P Global*.
• Guidance: 2025 capex lowered to $2.0–$2.3B (from $2.1–$2.4B) and Q2 2025 production guided to 710–760 MBoed; oil midpoint maintained while gas and BOE midpoints raised; dividend set at $0.22 and balance sheet priority is deleveraging $1.0B term loans in 2025.
• Catalyst: Reallocation from oil to gas (Permian rigs cut, Marcellus rigs added), explicit deleveraging plan, and remediation of Windham Row Harkey wells with confidence in fix; medium-term free cash flow focus and optionality across basins.

What Went Well and What Went Wrong

What Went Well

• Production outperformed: total 747 MBoed near high end; gas 3,044 MMcfpd above high end; oil 141.2 MBopd ~2% above midpoint.
• Capital discipline: incurred capex $552M vs $525–$625M guidance lower half; Q1 FCF $663M; unit operating costs tightly managed at $9.97/boe.
• Strategic flexibility and balance sheet: cutting Permian rigs to 7 in H2, adding Marcellus rigs; plan to retire $1.0B term loans; “Coterra is an arc, not a party boat,” emphasizing resilience through cycles.

What Went Wrong

• Reported revenue/EBITDA below consensus, driven by non-cash derivative losses (-$112M) lowering operating revenues to $1.904B and pressuring EBITDA-like measures vs expectations.
• Windham Row Harkey wells had mechanical/cementing issues leading to increased water production and deferred projects; remediation underway and volumes excluded from 2025 guidance ramp.
• Unit operating cost rose sequentially ($9.97/boe in Q1 vs $8.89/boe in Q4), reflecting mix shift to oilier assets with higher per-unit LOE (but with strong margins).

Transcript

Operator (participant)

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Coterra Energy first quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's rem arks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star and one. I would now like to turn the call over to Dan Guffey, VP of Finance, Investor Relations, and Treasurer. You may begin.

Dan Guffey (VP of Finance, Investor Relations, and Treasurer)

Thank you, Kayla. Good morning, and thank you for joining Coterra Energy's first quarter 2025 earnings conference call. Today's prepared remarks will include an overview from Tom Jorden, Chairman, CEO, and President; Shane Young, Executive Vice President and CFO; and Blake Sirgo, Senior Vice President of Operations. Michael Deshazer, Senior Vice President of Business Units, is also in the room. Following our prepared remarks, we will take your questions during our Q&A session. As a reminder, on today's call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures, forward-looking statements and other disclaimers, as well as reconciliations to the most directly comparable GAAP financial measures provided in our earnings release and updated investor presentation, both of which can be found on our website. With that, I'll turn the call over to Tom.

Tom Jorden (Chairman, CEO, and President)

Thank you, Dan, and thank you for all of you who are joining us on this call. Coterra had an excellent first quarter. We delivered oil production near the high end of our guidance and natural gas production that exceeded the high end of our guidance. CapEx came in near the low end of our guidance. Furthermore, we generated excellent financial results, returned a substantial portion of our free cash to our owners, and retired $250 million of our term loans. We closed on the Franklin Mountain and Avant acquisitions and immediately launched into the job of integrating these high-quality assets into our operations. We are pleased to report that we have identified and captured significant operational efficiencies, are bringing these new assets into emissions performance consistent with Coterra standards, and have seen well-performance on recent flowbacks that exceeds our expectations.

Shane and Blake will provide more detail on our financial and operational results and outlook. We hope that you will note that the opening slide in our updated investor deck discusses who is Coterra and why own Coterra. We think that the recent volatility in the commodity markets, uncertainty over the impact of tariffs, and fears of recession strengthen the core thesis of why Coterra. Simply put, we were built for this. Coterra is an arc, not a party boat. Our diversified revenue, low-cost oil and natural gas supply, technology-driven organization, economic focus, and financial discipline make us tailor-made to ride out this storm and thrive in it. Slide four in our deck illustrates the resiliency of our cash flow under various oil and natural gas price scenarios. None of us can predict the future.

Nonetheless, Coterra is a company that can generate significant free cash flow through the cycles, generate outstanding returns and modest growth with a low reinvestment rate, and maintain a pristine balance sheet. This is a testament to our organization, our assets, and our culture. Why Coterra? The question answers itself in times like these. Commodity downdrafts are a part of our business. They do not come pre-labeled with how long they will last, nor how severe they will be. Our experience tells us that in times like these, it is better to err on the side of caution. We have more concern regarding the oil outlook rather than the outlook for natural gas. Consequently, we are modestly pulling back some activity in the Permian Basin and incrementally adding activity in the Marcellus Shale. In aggregate, these moves will reduce our projected 2025 CapEx by $100 million.

We have plans on the shelf to make further moves up or down if we see material changes in our outlook. Our team continues to put tremendous effort into plan iterations, and we are ready for a wide range of potential scenarios. In particular, the net $100 million reduction in 2025 CapEx is a combination of $150 million of reductions in the Permian, coupled with $50 million of increases in the Marcellus. We have contingency plans that would allow us to make additional cuts from the Permian if oil prices continue to weaken. We could redeploy to highly profitable gas opportunities, advance debt retirement, pursue opportunistic buybacks, or bank the savings. Shane will comment further on this. We have described our approach to capital allocation and planning as the difference between a rifle shot and a guided missile. Once the trigger is pulled, the rifle shot is unchangeable.

The guided missile can be adjusted and repositioned along the way. In the case of our current macro environment, we not only have a guided missile, but we have a moving and unpredictable target. This screams for flexibility. With low cost of supply oil and natural gas assets, robust drilling returns, few long-term vendor commitments, and a culture that is adaptive, we will guide our way through 2025 and beyond. We are committed to debt reduction in 2025, particularly pertaining to the $1 billion term loan that we executed in conjunction with our recent acquisition. As we have said, we never lose a moment's sleep worrying about our debt being too low. We have seen our peers go through existential crises during significant downdrafts, and we are committed to make sure that Coterra can sail through any storm and emerge stronger because of it.

Finally, I want to make a few remarks about our recently completed Windom Row project. To recap, the Windom Row infill project contains 73 total wells, 51 Wolf Camp wells, and 22 Harkey wells. Our results on the Wolf Camp wells have been outstanding. While completing the Harkey wells, however, we noticed abnormally high water production on a handful of wells. We have strong evidence to suggest that this is due to behind-pipe water flow from shallower zones. We have drilled Harkey wells throughout our assets in New Mexico and Texas and have only observed this phenomenon in the eastern portion of our Culberson County acreage block. It is not a reservoir nor a spacing issue. This is also not a co-development or overfill issue. The evidence points to this being a near-wellbore mechanical issue. We think that it is fixable, and we have well remediation solutions underway.

We are very encouraged by the results that we have seen thus far. While we work through wellbore remediation, we are pausing Harkey development in this local area. It doesn't make any sense for us to continue to drill and complete Harkey wells in this immediate area until we are fully satisfied that we have solved the issue. We expect to correct the issue during the second quarter and restore these Harkey wells to production. We believe the go-forward production forecast for the affected wells is conservative, providing potential upside for the remainder of the year. With this pause in local Harkey development, we are pivoting to our highly productive Wolf Camp. Ironically, this will increase our capital efficiency. Our full-year production guide remains unchanged, with our capital guide decreasing slightly. We have never managed our company with short-term production goals.

We focus on full-cycle value creation, underwritten by sound science, objective data, and tough and disciplined decision-making. This is the winning formula for long-term value creation. With that, I'll turn the call over to Shane and Blake to discuss our results and outlook in greater detail.

Shane Young (EVP and CFO)

Thank you, Tom, and thank you, everyone, for joining us today on this morning's call. Today, I'd like to cover three topics. First, I'll summarize the highlights of our first quarter financial results. Then, I'll provide an update on our guidance, including the second quarter as well as the full year 2025. Finally, I'll provide an update on our balance sheet and cash flow priorities for the remainder of the year. Turning to our strong performance during the first quarter, the first quarter's performance included just over two months of results from our recently acquired assets from Franklin Mountain and Avant. We are pleased with the rapid integration of these assets, and their contributions have been in line to slightly better than our expectations.

During the first quarter, Coterra's oil production came in about 2% above the midpoint of our guidance, with BOEs near and natural gas above the high end of the guidance ranges. Net turn-in lines during the quarter were 37 in the Permian, below the guidance midpoint of 40, and the Marcellus was at zero, as expected. Pre-heads revenues came in at $2 billion, up from $1.4 billion in the fourth quarter of 2024. 45% of revenues came from natural gas, up significantly from prior quarter due to strong production and a 64% increase in natural gas price realizations. Cash operating costs per unit totaled $9.97 per BOE, inclusive of about $0.21 per BOE of non-recurring costs related to the transaction. Reported net income of $516 million, or $0.68 per share, and adjusted net income of $608 million, or $0.80 per share.

Incurred capital expenditures in the first quarter were 4% below the midpoint of our guidance range, with lower-than-expected drilling and midstream costs. Discretionary cash flow for the quarter was $1.135 billion, up significantly from $776 million in the prior quarter, and free cash flow was $663 million after cash capital expenditures. Looking ahead to the second quarter and full year 2025, second quarter results will reflect a full quarter's contribution from the recent acquisitions. During the second quarter of 2025, we expect total production to average between 710 and 760 MBOE per day. Oil is expected to be between 147 and 157 MBO per day, and natural gas is expected to be between 2.7 and 2.85 BCF per day. These guidance ranges reflect updates in the Culberson Harkey program, including the deferment of a few projects as we begin to shift to additional Upper Wolf Camp development in Culberson County.

The net result of these changes is a reduction in oil production by approximately 5,000 bbls per day in the second quarter relative to our February expectations. Despite these second-quarter changes, we are maintaining the midpoint of our 2025 annual oil production guidance. In the second quarter, we expect incurred capital to be between $575 million and $650 million, which should be the highest quarter for the year as we will have increased tills in all three business units. Coterra was built to respond to market signals, and we have both the ability and willingness to adapt to changing conditions. For the full year 2025, we are optimizing our investment allocation while lowering the capital range by $100 million. We now expect incurred capital to be between $2 billion and $2.3 billion for the year and over 4% reduction from February guidance.

Given a continued constructive outlook for natural gas, we are maintaining the second rig in the Marcellus into the second half of 2025. As previously noted, this adds $50 million to the 2025 program. Should we choose to keep the second rig working for the full year, this could result in an incremental $50 million added to the program late in 2025, while still staying within our revised guidance range. In addition, due to softness in crude pricing, we are slowing development and reducing Permian activity by $150 million. If warranted, we have the flexibility to make additional adjustments to our investments later in the year that would take total investment towards the lower end of our guidance range.

For 2025, while lowering capital, we are maintaining our oil midpoint guidance and increasing the midpoint of production guidance for MBOEs in natural gas, which highlights the capital efficiency of our diverse drilling opportunities. Simultaneously, we are tightening the range for MBOEs, oil, and natural gas. MBOEs are now expected to be between 720-770 MBOE per day for the year. Oil is expected to be between 155-165 MBO per day for the year, with significant increases in each subsequent quarter. Natural gas is expected to be between 2.725-2.875 BCF per day, delivering over 1 TCF of gas on an annualized basis and providing significant leverage to higher natural gas prices.

Having only a partial full quarter contribution from the new Permian assets impacts full year 2025 production by a little over four MBOE per day relative to if the transactions had closed on January 1, 2025. In this environment, the benefits of our diverse and balanced commodity mix become increasingly evident. On page four of the new slide deck we published last night, we illustrate the durability of our free cash flow across multiple commodity price files. Coterra is positioned to thrive and maintain a reinvestment rate of around 50% of cash flow in a variety of commodity price scenarios and ranges of oil to gas price ratios. Regarding our three-year outlook, we maintain our conviction in our ability to deliver consistent, profitable growth to our shareholders.

As we've stated before, our deep project inventory can deliver 5% or greater oil volume growth and 0%-5% BOE growth over this period by investing between $2.1 billion and $2.4 billion of capital per year if we choose to do so, even with the changes to our 2025 that we announced today. These growth rates reflect legacy Coterra organic growth in 2025 and include our recent acquisitions for 2026 and 2027 growth. This outlook delivers increasing capital efficiency and is designed to afford Coterra the flexibility to reallocate capital between our business units as market conditions change. We believe this outlook has an attractive, repeatable level of reinvestment and generates meaningful free cash flow to underpin both our shareholder returns and our deleveraging goals. Turning to shareholder returns and the balance sheet, yesterday we announced a $0.22 per share dividend for the quarter.

This remains one of the highest-yielding base dividends in the industry at over 3.4%, and we remain committed to reviewing increasing the base dividend on an annual cadence. During the first quarter, we repaid $250 million of our outstanding term loans that were used as part of the financing of our recent acquisitions. We ended the quarter with an undrawn $2 billion credit facility and a cash balance of $186 million for total liquidity of $2.2 billion. We expect to continue to prioritize deleveraging, and in the current environment, we expect to fully repay our billion-dollar term loan during 2025. As a result, and as previously noted, share repurchases will be back-end weighted in the second half of 2025. We are focused on quickly getting our leverage back to home to around 0.5x net debt to EBITDA.

Coterra is committed to maintaining a fortress balance sheet that is strong in all phases of the commodity cycles, enables us to take advantage of market opportunities, and protects our shareholder return goals. In summary, Coterra's team delivered a quarter of high-quality results, both operationally and financially, and across all three business units. These results show that we've hit the ground running in 2025. For the remainder of the year, we expect strong quarterly oil production increases, substantial free cash flow generation, and rapid deleveraging. With that, I'll hand the call over to Blake to provide additional color and details on our operations. Blake.

Blake Sirgo (SVP of Operations)

Thanks, Shane. The first quarter of 2025 was marked by the integration of our new Delaware assets into our Permian operations program. Our teams have been hard at work applying our best practices to these assets, and we are already seeing wins in the field.

Our DNC team has been able to lower our dollar per foot by 10% from the previous operators by bringing our program efficiencies to bear. Initial productivity from these new assets is beating our expectations, and we are iterating on well spacing and frac design to further improve capital efficiency. Our production and midstream teams are focused on minimizing downtime and, as such, have realized a substantial drop in flared volumes across the assets. We also see significant opportunities to optimize the infrastructure and midstream assets across our northern Delaware position. Our updated Permian plan calls for a reduction in activity as we respond to headwinds in the oil market. We now plan to run seven rigs in the second half of 2025, down from our original guidance of 10 rigs. These changes in activity reduce CapEx in the Permian by $150 million.

We maintain significant flexibility across our rig and frac fleets and have additional off-ramps available to us throughout the year. In Culberson County, we have finished completing our Wyndham Row Harkey wells. As Tom mentioned, we have encountered some mechanical issues on Wyndham Row, resulting in mixed results for our Harkey wells. We have collected data that indicates a lack of adequate cement on certain wellbores, which has allowed water from our shallow disposal zone to find its way into portions of the upper Bone Spring interval. This has led to increased water production on roughly half of our Harkey wells on Wyndham Row and made it difficult for the affected wells to draw down reservoir pressure and produce the expected oil volume. We have kicked off a workover program to remediate these wells, and our early results are encouraging.

This remediation campaign will continue over the next several months, and we will be closely monitoring the production response from these wells. While we are working through these remediation efforts, we will focus our row developments on the Upper Wolf Camp. The 51 Upper Wolf Camp wells brought on in Wyndham Row look very strong and continue to meet or exceed expectations. Our Permian team's ability to quickly adjust to the Upper Wolf Camp and continue our efficient operations is commendable. Their great work has allowed us to maintain our full year 2025 oil guide and improve our capital efficiency. Importantly, we expect the efficiency gains captured on Wyndham Row will continue on future developments.

In our next two row developments in Culberson, the Barber Row and Bowler Row, we will focus on Upper Wolf Camp development, which has been the bread and butter of our Culberson project over the last decade. We expect no change to spacing or productivity in our Wolf Camp program. As you can see in our investor deck, by shifting more capital to the Upper Wolf Camp, our Permian asset productivity is expected to increase in 2025 and over the next few years. Coupling this increased productivity with lower capital spend, we are seeing improving capital efficiency. Switching to our natural gas assets, Coterra is happy to be back to work in the Marcellus with two rigs that began drilling in April and the recent completion of our Jeffers Farm project.

Gas macro conditions and northeast storage volumes continue to support a robust 2025 and 2026 strip, and as such, we are electing to add $50 million to the Marcellus program. Should conditions warrant, we hold a second on-ramp option later this year that could add an incremental $50 million to the program. Our Marcellus team continues to improve capital efficiency with our full year 2025 Marcellus dollar per foot expected to come in at $800 per foot, a 22% reduction from 2024. This improved cost structure comes on the back of a 4 mi lateral program, as well as reduced DNC service costs and water transfer costs. This plan picks up a frac crew later in 2025 and allows us to complete several great projects just in time for winter 2025 and into 2026.

In the Anadarko, we are executing on a strong 2025 program with a competitive cost structure and new 3-mi projects. Strong well performance and lower costs, paired with a premium local gas market, are continuing to make this asset an attractive place for Coterra to invest. We are excited to report that we have begun flowing back one of the largest natural gas developments in the Anadarko and expect to discuss results later this year. Coterra has an organization, asset portfolio, and balance sheet that is positioned for success in periods of volatility. Our ability to redirect capital and optimize for the current environment is a key strength of the company. Our teams remain as focused as ever. We are executing on our new assets in the Permian while improving their capital efficiency.

We are reducing and reallocating activity in response to pressures in the crude market and taking advantage of structural natural gas macro tailwinds. We will remain nimble and focused on creating long-term value for our shareholders. With that, I'll turn it back to Tom.

Tom Jorden (Chairman, CEO, and President)

Thank you, and we're delighted to take your questions.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Please limit to one question and one follow-up question. Our first question comes from the line of Doug Leggate with Wolfe Research. Your line is open.

Doug Leggate (Senior Research Analyst)

Oh, thanks, everybody. Thanks for taking my questions. Guys, obviously, there's a lot of attention on this Harkey shale issue. I think, Blake, you've given a fairly thorough explanation as to what happened, but I just want to put a bow on this. Basically, this was a cementing issue, it sounds like. That sounds like it's temporary. It doesn't sound like it's got any read-through. What does it mean for your view of inventory depths as you think about your future development plans? My follow-up is on the change, obviously, the change in activity is somewhat transitory, I guess, given everything that's going on. You did just lay out a three-year plan a couple of months ago that laid out sort of 5+% oil growth. I'm curious, how does the thinking on that change and the associated capital that goes along with it?

I'll leave it there. Thank you.

Tom Jorden (Chairman, CEO, and President)

Yeah, Doug, I'm going to start it, and then Blake will add any comments. A lot of elements of that question, I'll take them in reverse order. Our three-year plan is intact. We don't see any meaningful change to our three-year plan. I'll also say we don't think this impacts our long-term inventory. We think this is a local mechanical issue that's fully solvable. We have a couple of remediation steps underway. It's one that, as Blake said, we think is associated with some shallow saltwater disposal that is somewhat unique to the eastern Culberson County. I'm going to just also say, Doug, we're a science-driven organization. Much as I'd love to say we walk on water, we occasionally have operational problems. When we saw this, we said, "Look, we need to understand this fully." We shut this down.

While we studied it further, we collected a lot of data, but we said, "We really need to understand this before we move forward with this program." We've got that data in hand. We think we understand the phenomena. We're going to tell you what we know and tell you what we don't know. Right now, we're pretty optimistic that this is a mechanical operation that is solvable with a combination of a revised pipe design and cementing program. Blake, you want to comment on that?

Blake Sirgo (SVP of Operations)

Yeah, I'll just say, Doug, coming into Wyndham Row, we had drilled and completed over 30 successful Harkey wells in Culberson County. We use the same wellbore designs and cementing jobs we always have. We thought we were well-calibrated. Sometimes a oil field still surprises us. That is what we're dealing with here. It's not a ubiquitous issue. We have several wells performing just fine. Our teams are hard at work solving this. We have other tools in the toolkit. We have different cement jobs. We have different wellbore designs. We're deploying all those right now. We will figure out the optimal solution, and we will fix this, and we will move forward.

Doug Leggate (Senior Research Analyst)

Okay, guys. Thanks for your answers.

Operator (participant)

Your next question comes from the line of Betty Jiang with Barclays. Your line is open.

Betty Jiang (Equity Research Analyst)

Hi, good morning. Thank you for taking my question. I appreciate all the color on Harkey earlier, but I do think it's important just to flesh out sort of the potential impact to the future developments. If you are focusing on the future roles just on Wolf Camp, are you going back to the Harkey on those roles? Does that have any impact on the mix of wells if we look out into 2026?

Tom Jorden (Chairman, CEO, and President)

Yeah, Betty, 2026 is a long ways away. Our expectation, I'll just say this, is that we remediate this issue and we get back to restoring our Harkey program as it was before we paused. Now, we've talked in the past that we really think co-development is preferable to overfill, but the time elapsed between when the Wolf Camp comes on production and when the Harkey comes on production is a critical variable. As we currently see it, we think we'll be back to completing and drilling these Harkey wells in months, not years, and that the overfill effect will not be significant. This is a mechanical issue, but not a strategic issue in terms of how we're going to prosecute. We don't think we've lost inventory.

We think we've just appropriately paused while we figure this out and come back with an approach that will allow us to develop these Harkey wells prudently and without this water. Blake, you want to comment on that?

Blake Sirgo (SVP of Operations)

Yeah, I mean, I would just echo what Tom said there. I mean, we think this is a prudent step to adjust our mechanical process on how we construct wellbores, cement wellbores, whatever the optimal solution is. In the meantime, we'll be executing our Upper Wolf Camp program. We have a long history in the Upper Wolf Camp in Wyndham Row has been very strong, excellent performance. We expect that to continue. Meanwhile, all our row efficiencies, our simul-fracking, our electric crew, everything continues as is. From a capital efficiency standpoint, it's actually slightly better in the near term just because of the productivity of the Upper Wolf Camp. We are still very focused on solving the Harkey and getting back to the original program if possible and vetting that out.

Betty Jiang (Equity Research Analyst)

I really appreciate that. Just on the production guide, the full year guidance would imply a fairly big ramp from second quarter, maybe to the mid-170s level in Q4. Could you just help us get more comfort on that trajectory, the timing of the wells, and what type of risking is being done within that guide? Thanks.

Tom Jorden (Chairman, CEO, and President)

Yeah, Betty Jiang here. I'll speak to that again. Look, I think you're right. These all hold together in terms of the quarterly guidance versus the annual guidance, etc. We do anticipate seeing substantial sequential step-ups in production through the course of the year. If you look at the TIL guidance that we provide for the second quarter, you'll see it's meaningfully up from where we were in the first quarter, which will lead to very strong third and fourth quarter production.

Operator (participant)

Your next question comes from the line of Nithin Kumar with Mizuho. Your line is open.

Nithin Kumar (Senior Equity Research Analyst)

Hi, good morning, guys. Thanks for taking my question. Tom, I want to start off a little bit broader. You mentioned in your opening remarks about the rifle shot and the guided missile. You and one of your peers today have cut activity in response to the current uncertainty. The current administration ran on an agenda of drill, baby, drill. I am just trying to understand, from your perspective, how long do you think this weak environment could continue between the demand that is being destroyed a little bit and then the supply that is coming on?

Tom Jorden (Chairman, CEO, and President)

Is that all?

Doug Leggate (Senior Research Analyst)

I just wanted to hear what your view is.

Tom Jorden (Chairman, CEO, and President)

No, no. You asked, and this is not just my view, but I think the view of Coterra. I'll just say this. We're a little over 100 days into this new administration, and good Lord, there's been a tremendous amount of volatility introduced, whether we're talking about in the oil markets or tariffs in our relations around the world. All of these converge on forecasts for our oil price. The president is trying to do a lot of difficult things upfront, and the White House is in a hurry. We have some sympathy for that sense of urgency. I'll just say this. I think the White House has been fairly consistent that they want low oil prices, that that is a bit of a turbocharge to the economy, and we're expecting that to continue.

We think that certainly a lot of what's going on with OPEC is perhaps all tied together in concert with what's happening in the Middle East broadly and some of these conflicts. We are prepared for this to last a while. We're hopeful that these tariffs get resolved and that the threat of recession is lifted. Our experience tells us that we can't run our program on hope, and we better be prudent and make adjustments accordingly. The thing we're very grateful for is that this isn't a situation that shuts our capital program down. It just redirects it. We have some really attractive gas opportunities we could pivot to. We are battening down the hatches, expecting this to last for a while, in answer to your question.

Nithin Kumar (Senior Equity Research Analyst)

Great. Thanks for taking a shot at that. I know it's a difficult question. My second question is around cash returns, and maybe Shane can take it. You've talked about returning at least 50% or more of free cash flow. Obviously, buybacks were second-half faded. You talked a little bit about the balance sheet. If commodity prices do weaken from here, how do you prioritize between buybacks and debt reduction?

Shane Young (EVP and CFO)

Yeah, no, I appreciate the question. We poured the plan and rolled it out back in February. We talked about sort of the ability to do it all. Since then, prices have come in a little bit. If you look at page 10 in our deck today, where we talk about free cash flow and how much it is, we still have the ability to do it all, so to speak. To be really clear, in 2025, our priority is going to be debt repayments. We're not going to compromise that. That does not mean that there's not going to be repurchases. We can be opportunistic, and we will be back-end weighted. If you look at 2024, we returned 90% of cash flow to shareholders. In 2023, we returned 76% of cash flow to shareholders. Why were we able to do that?

Because we had low leverage. We believe that having low leverage is an enabler. We are dead-set focused on protecting our long-term shareholder return objectives. We think the best way to do that is to reduce debt.

Operator (participant)

Your next question comes from the line of Arun Jayaram with JPMorgan. Your line is open.

Arun Jayaram (Research Analyst)

Yeah, good morning. I just wanted to get an update on the Barbaro and how does the issues that you've experienced on the Harkey program impact the development program there. I believe the original plan was to do 20 Wolf Camp wells and eight Harkey wells. What is the status, perhaps, of those eight Harkey wells that was in the original plan?

Michael Deshazer (SVP of Business Units)

Hey, Arun, it's Michael. Yes, you're correct. We have 20 Wolf Camp wells and eight Harkey. We have completed two of the Harkey wells, and there are six additional Harkey wells that we're going to duck currently. We will update you on those as we move forward. At this point, they've been removed from the current frac schedule, and we'll proceed with the Wolf Camp completions.

Tom Jorden (Chairman, CEO, and President)

Yeah, I was just going to add on to that that given the status of those, when those do come back into the program, they're going to be highly capital efficient, just given that a portion of that capital has already been put into the ground.

Arun Jayaram (Research Analyst)

Got it. Got it. That's helpful. Just maybe just a thought on how does the reduction in your rig count in the Permian, how is that impacting your thoughts on the three-year program? Obviously, as Betty mentioned, the second-half run rate for oil will be higher, just given the shift to the Wolf Camp from the Harkey. How does that help us square away the reduction in CapEx on the Permian and just maintaining that three-year program?

Tom Jorden (Chairman, CEO, and President)

Yeah. I can take that. First, we've reduced in the Permian $150 million, $120 million DNC. We've gone from 10 to 7 in the second half of the year. It does not alter the overall outlook over the three-year window. We believe within the parameters that we've set out, which is $2.1 billion-$2.4 billion of capital over the next three years, each year over the next three years, that we've still got the ability to do 5%+ oil volume growth and 0%-5% BOE growth over that period, even with the changes that we've talked about today to the second half of 2025.

Operator (participant)

Your next question comes from the line of Neil Mehta with Goldman Sachs. Your line is open.

Neil Mehta (Managing Director)

Yeah, thanks for all the color here. Tom, we've talked a lot about oil today. Just curious on your perspective on natural gas. You are restarting two rigs here in the Marcellus. Can you talk about what your priorities are for the Marcellus plan for the balance of the year and how that ties into your macro view for gas?

Tom Jorden (Chairman, CEO, and President)

Yeah, thank you for that. I just want to remind the listener that we produce just a hair under 3 BCF a day of natural gas. The increase in natural gas outlook is wonderful, but the increase in natural gas prices is a remarkable turbocharge to our cash flow and provides the kind of resiliency we've talked about. We are getting back to work in the Marcellus. We've made tremendous progress redesigning our Marcellus program. We've talked about that on past calls, but the net result is a more efficient way to handle water, the flexibility to be able to go to zero activity or full steam ahead, longer laterals, and it's just been a remarkable redesign that's also resulted in much lower cost structure. Go forward, I anticipate our Marcellus program to be back to a growth profile.

How aggressively we grow is a function of all the moving parts that we've talked about in this call. We are really encouraged by the economic and reservoir performance of our natural gas assets, both in the Marcellus and in the Anadarko.

Tom, I mean, it's been a couple of years now, but there have been discussion points about the depth of the natural gas portfolio as you've drilled out a lot of the Northeast PA. Maybe you could respond to that viewpoint about depth of inventory. Do you feel like you have the organic position that you want here now that you've done the Franklin Mountain deal on the oil side? Does it make sense to think about gas M&A? Just your perspective and addressing that debate that's out there.

We think about that throughout our portfolio. I mean, if you ask me if we have enough inventory, my answer to that is determined a decade ago. It's going to be no. I'm an explorationist at heart. As we show on slide 11, we have about a dozen years of inventory at our current run rate. That production base that underpins that, that's inventory. With that production base, we're really nicely positioned. We always want to be opportunistic, whether it's oil, natural gas, or what have you. We're built to last, and I think we're going to be a survivor here. Inventory is important to us. We think we don't have a problem to solve, but we're going to be opportunistic. That's not to telegraph that, like I say, we've got really solid plans, and there's not a problem to solve there.

Operator (participant)

Your next question comes from the line of David Deckelbaum with TD Cowen. Your line is open.

David Deckelbaum (Managing Director and Senior Analyst)

Thanks for taking the questions, guys. Maybe just I wanted a clarification on just the ramp in the second half of the year with the Wolf Camp wells coming online. Does the guidance presume that that 5,000 bbl a day impact in the second quarter from the Harkey wells? Does that come back as a 5,000 bbl a day contribution into 3Q and 4Q?

Shane Young (EVP and CFO)

Yep. David Shane here. Yeah. No, it does not. It does not assume that it comes back. Obviously, Blake walked through all the things the team is doing to get us to a different outcome, a better outcome than that. The assumption that we are talking about in terms of the substantial sequential step-ups that we see in production in the back half of the year does not at all rely on those volumes coming back.

Tom Jorden (Chairman, CEO, and President)

Yeah. We've taken a, as I said in the opening remarks, we've taken a very conservative approach. We think we're going to bring those volumes back. Our current plan, we've just taken them out, and we're looking at a fairly significant production growth ramp during the course of the year. We're confident, hopeful, and our technical analysis tells us that this problem is fixable and that a lot of those volumes are coming back.

David Deckelbaum (Managing Director and Senior Analyst)

Appreciate that, Tom. Just my second question, you guys highlighted the flexibility that you have with your asset base and talked about, I think, the 15:1 oil to gas price ratio currently at strip pricing. You're still seeing sort of the coincident 50% plowback in terms of CapEx. As you enter in the next couple of years, I think you guys reiterated the three-year outlook. If you go back to that guided missile analogy, if that oil to gas price ratio holds as we enter into next year, should we presume that there's more reallocation from oil to gas-weighted assets?

Tom Jorden (Chairman, CEO, and President)

What you ought to presume is that we get up every day and make the best financial decisions in the interest of our shareholders that we think are prudent. I'm hesitant to even use the word three-year plan. It's a three-year outlook of what we could execute if current conditions were to hold. If current conditions do not hold, I think it's our responsibility, not just our opportunity, but our responsibility to say to our owners that we will readjust as conditions warrant. The beauty of it is we have amazing flexibility. I mean, when we look across our landscape right now, we could barrel ahead at $50 oil and continue to invest in our oil assets. The returns are not bad. I mean, they're certainly better than if we rewind not too many years ago with anything we were experiencing.

We are making these steps because we are concerned about future weakening in oil prices. It is a remarkable position to be able to say, "Look, we could invest in oil. We could invest in gas. We have got the NGL revenue." Everywhere we look in our portfolio, we have opportunity and not barriers. We are just trying to adjust to the macro condition as we think is appropriate. That is what we are going to continue to do.

Operator (participant)

Your next question comes from the line of Scott Gruber with CD Capital. Your line is open.

Scott Gruber (Senior Research Analyst)

Yes. Good morning. Just wanted to come back to the Harkey production. You said with the cement remediation, you're working to bring those volumes back, but it's not in guidance. What is the reasonable expectation for when those volumes could come back if the remediation work is successful?

Tom Jorden (Chairman, CEO, and President)

Yeah. We don't have a firm timeline on that just due to the nature of the workovers. These workovers will take months. It's a pretty big campaign to work through all the wells. Like we discussed, we have multiple things. We're trying to make sure we get good isolation. It's months out, not weeks out.

Scott Gruber (Senior Research Analyst)

Got it. I appreciate you guys are constantly looking to adjust given changes in prevailing conditions. Curious just about kind of early thoughts on what would happen to 2026 as if oil follows the curve here in the high $50s. Do you end up maintaining seven active rigs in the Permian? If you maintain seven, what does that mean for Permian tills in 2026 and Permian production?

Tom Jorden (Chairman, CEO, and President)

Yeah. Let me say that if oil were hovering around $60, you said high $50s, low $60s, we have the opportunity to make investments in our oil assets. I mean, it's not like that program is shut down. It's not a question of what the number is. It's a question of why the number is. Does it move up a little bit because OPEC decided to pause their reinstate their curtailments for a quarter and that it could happen again three months down the road? Or does it happen because this tariff situation is resolved? We're back to normal trade relations. The world economy is growing and demand increases. I mean, there's all kinds of moving parts here. Right now, we're pausing our oil program. Pausing, I say we're relaxing slightly because we're concerned that oil prices could further weaken.

I hope we're wrong on that, but our experience tells us that when you see these events and you see the possibility, be prepared for the worst-case scenario. That is kind of where we are. I hope we're overreacting on several of these issues, but you can accuse us of being conservative, and that's probably fair.

Operator (participant)

Your next question comes from the line of Josh Silverstein with UBS. Your line is open.

Josh Silverstein (Managing Director)

Yeah. Thanks. Good morning, guys. You're moving some CapEx over to the Marcellus. I'm wondering if there's any sort of limit into how much more capital you want to put there. Maybe is there not enough pipeline capacity for volumes to grow, or is there some sort of trigger you're looking for to continue to push that additional $50 million over?

Tom Jorden (Chairman, CEO, and President)

No, there's really not a significant limit. The Constitution Pipeline has been in the news lately. I just want to remind the listener that the Constitution Pipeline is originally configured, originates in our field in Northeast Pennsylvania, and goes into the New England market. We're watching and participating in that conversation seriously. If that were to go, the expectation is that we would make a commitment to deliver long-term volumes into that line. That's kind of coloring what we want to do at this point in time. We think that issue will resolve itself here in the next few months, but we're looking at that as a potential future opportunity for growth in the Marcellus.

Josh Silverstein (Managing Director)

All right. Just on the pricing side, you guys already have some power exposure. I think it's high single digits for the Marcellus. Given that you guys already have this, I'm curious if you can give us kind of a backdrop as to maybe if you would add some more, a little bit more about what's happening within that power pricing for the Marcellus for you guys.

Blake Sirgo (SVP of Operations)

Yeah. Josh, this is Blake. We're always looking for more power pricing. The two deals we have in Marcellus are excellent deals. They've paid very well over time. They're difficult to replicate. I think that's really the challenge we've been after. We're really interested in particularly greenfield projects where we can capture upfront the long-term power strip that we're hoping to get into our gas portfolio. There are a few opportunities in the Marcellus, but we're looking at quite a few opportunities in the Permian as well. I think the market is waking up to the disadvantaged molecule and that it's a great place to generate electrons. We're looking at many different ways to participate in that.

Operator (participant)

Your next question comes from the line of Kalei Akamine with Bank of America. Your line is open.

Kalei, your line is open.

Kalei Akamine (Senior Equity Research Analyst)

Sorry. I was on mute. I've got a different question on the Harkey here. Kind of looking beyond the water issue, were the wells long enough to get a read on the productivity and how it compares to the Wolf Camp?

Tom Jorden (Chairman, CEO, and President)

Yes. What we see in the Harkey, one of the things that gives us a high degree of confidence that this problem is solvable in that it's not on every well. We've got a couple of drilling spacing units that look like they're performing just fine and making oil volumes that are within a reasonable boundary of expectation. Yeah, we think the laterals are long enough. As I said in my opening remarks, we are highly confident that this is not a reservoir issue per se, and it's not a spacing issue. It's not an overfill versus co-development issue. It's a mechanical issue, near wellbore, fixable near wellbore. We have an overwhelming bounty of evidence that's suggesting that. We're a company that focuses on results, and we want to see the results of these remediations, and we will communicate that along the way.

Kalei Akamine (Senior Equity Research Analyst)

Thanks, Tom. For the follow-up, kind of following up on one of the earlier questions here, if this is the new program, if this program is a new template kind of going forward, can you give us a sense of what the runway capital and the oil plateau could look like? If oil were to decline, would you still expect wet gas production to increase?

Tom Jorden (Chairman, CEO, and President)

Yeah. I'll say we don't expect oil to decline. If I'm understanding your question properly, we see a good runway as our three-year plan had outlined of reasonable growth in our assets broadly. Shane, you want to comment on that?

Shane Young (EVP and CFO)

I mean, if I understand the question correctly, I mean, I think if we were to stay on this path into the future, we would go well through the end of this decade in terms of the opportunity set that we have there, even if it was this path.

Tom Jorden (Chairman, CEO, and President)

Yeah. We're not, we're holding to our three-year plan as outlined with the changes that we've discussed in this call. I want to be really clear with everybody on that. We've got a very fulsome model that shows that that three-year plan is reaffirmed.

Operator (participant)

Your next question comes from the line of Matt Portillo with TPH. Your line is open.

Matt Portillo (Director of Research)

Good morning, all. Tom, maybe just a question around maintenance capital. Given the outlook for the second half of 2025 with production potentially in the mid-170-ish range, could you give us an update on what you think you might need to spend to hold oil volumes flat over a multi-year period? Just trying to get a sense of your maintenance capital program.

Tom Jorden (Chairman, CEO, and President)

Yeah. I'm going to let Michael take that one.

Michael Deshazer (SVP of Business Units)

Yeah. I appreciate the question. As we're looking at the current program for 2025 and looking into the out years, as we've discussed, our three-year plan has oil growth. Obviously, the capital levels that we're currently at can be shed. We can remove capital to maintain that oil production. We also have oil growth coming from both the Anadarko and the Permian in most of our plans. It's important to think about that combination because we're funding in both programs. In general, right now, we see our oil growth. We have to think about where are we going to keep the oil production flat at. Right now, if we look at our 2025 volume of 160,000 bbls a day, if we were to keep that flat, we would be somewhere around $15 billion-$16 billion between the Anadarko and the Permian.

Obviously, the Marcellus capital is disconnected from any of that oil growth because it doesn't produce any oil.

Dan Guffey (VP of Finance, Investor Relations, and Treasurer)

Mike, you said that'd be for a multi-year period at which you could hold it flat, not just a single one-year hold.

Michael Deshazer (SVP of Business Units)

That's correct. Yes. That would be if we were to just go to a maintenance capital for a kind of three-year period.

Matt Portillo (Director of Research)

Perfect. Just a follow-up question. I know your programs are extremely flexible. I was curious how you're thinking about the returns in the Anadarko in a strip price environment versus the Permian program. Is there an opportunity heading into 2026, if we stay at strip, that you could further high-grade your development between the two basins?

Tom Jorden (Chairman, CEO, and President)

We high-grade our development all the time. Yes, we have an opportunity. It is really a function of that oil-gas ratio and also NGLs, natural gas liquids. We have some really nice Anadarko projects for which gas and natural gas liquids are combined to make the dominant revenue source. It is a function of the oil-gas ratio. We have talked about when we are down 15 to 1 and lower, it starts getting to be a pretty serious horse race among all three of our basins.

Operator (participant)

Your next question comes from the line of Derrick Whitfield with Texas Capital. Your line is open.

Derrick Whitfield (Head of Energy Equity Research)

Good morning, all, and thanks for your time.

Tom Jorden (Chairman, CEO, and President)

Morning.

Derrick Whitfield (Head of Energy Equity Research)

Slight twist on David's earlier question. Referencing slide four, if this forward oil-to-gas ratio were to persist, would it change your view on the areas and intervals you develop in the Delaware over your three-year forecast? I'm primarily thinking of Culberson with this question.

Tom Jorden (Chairman, CEO, and President)

I mean, no. I don't think it really changes where we go in the Delaware. All four of our operating areas, Eddy, Lea, Reeves, and Culberson County have really nice competitive environments. Now, Culberson tends to be a little gassier, which actually is good for our operating cost and our productivity. If we had a little stronger Waha price, that might have an impact. As we look at it at the strip, I don't think that'll really be a significant flex of capital within the Permian.

Derrick Whitfield (Head of Energy Equity Research)

Great. This is my follow-up. Regarding your contingency planning comments and your prepared remarks, what price do you see as the next tipping point in oil activity, assuming current service costs? That is to assume if we were going lower in price, clearly.

Tom Jorden (Chairman, CEO, and President)

I think if we were seriously looking at a price below $50, you'd see another tipping point.

Operator (participant)

Your next question comes from the line of Kevin MacCurdy with Pickering Energy Partners. Your line is open.

Kevin MacCurdy (Managing Director)

Hey, good morning. Looking out to the back half of 2025, what does the rig reduction do to your DUC backlog by the end of the year? Do you have to manage that operationally as you enter into 2026?

Michael Deshazer (SVP of Business Units)

Hey, Kevin. This is Michael. No, we move into 2025 with a nice duck inventory. Even as we're swapping out from Harkey into Wolf Camp, we're not seeing any major issues on our frac lines. Obviously, our rig count is long-term related to our frac fleet count. Dropping down to seven rigs, if that were to remain unchanged, holding the third frac crew consistently would be difficult. That is shown in our deck that there might be more spot work late in the year if we hold that seven rigs. That's not a problem for us operationally. We think that there's ample capacity in the frac market right now, and that's not necessarily a driving force for us.

Tom Jorden (Chairman, CEO, and President)

Kevin, we do a lot of planning, and included in those plans is a look at what our duck inventory looks like, both not only in terms of wells, but number of projects, number of pads. Both of those are really important in terms of operational flexibility. That is a real important planning. I do not know if you want to call it an input or output, but it is an important planning consideration. In the MBU, our ducks are configured often to hit winter pricing. It is just a point of active consideration wherever we are.

Kevin MacCurdy (Managing Director)

I appreciate that. As a follow-up, just a clarification on the free cash flow for the remainder of the year, the uses of free cash flow, I should say. Will you pay off the term loan first and then buy back shares, or can you do them concurrently? Are we reading it right that the 50% shareholder return is a multi-year goal and you may not get there in 2025? Thank you.

Shane Young (EVP and CFO)

Yeah. Look, just as we've done the last couple of quarters, we can and likely will continue to do both in a parallel way. It's just what's the weighting? Is one front-end loaded, one back-end loaded? I don't know that we necessarily have to make a choice, one or the other, as we go along. There's a lot of different considerations that will go into the timing and amount of those buybacks. No, we have not shut down the buyback program by any means. We'll continue to be opportunistic as we go through the rest of the year. We'll also be focused on what does the cash flow profile look like for the rest of the year as well. Certainly, if you look back over time, as I said earlier, in response to a question, we've historically been well above 50%.

Again, we've been at 90%. We've been in the mid-70% at various points in time. Why were we able to be there? We were able to be there because we had low leverage. We think getting the notes paid down early on really helps facilitate stability of shareholder returns for the long-term.

Operator (participant)

I would now like to turn the call back over to Tom Jorden.

Tom Jorden (Chairman, CEO, and President)

Yeah. I want to thank everybody for a series of great questions. I'll just say in closing, personally, I'm deeply proud of the way our organization has responded to not only this volatile time, but also this operational issue we're facing. I think we're on the right track. We have a solid plan, and we're going to perform and surprise to the upside. Thank you very much for your attention this morning.

Operator (participant)

This concludes today's conference call. You may now disconnect.